If we subtract the default-risk premium from the yield on a risky security we derive the promised marginal yield on a risky security.

Question

Quizplus · Accepted Answer

Subtracting the default-risk premium from the yield on a risky security gives us the risk-free rate, not the promised marginal yield on the risky security. The promised marginal yield is the total yield expected from the security, which includes the risk-free rate plus various premiums for taking on additional risks, such as the default-risk premium.

If We Subtract the Default-Risk Premium from the Yield on a Risky