Risk premium (default premium) The premium included in the price of loan capital for particularly hazardous circumstances with the debtor. The risk premium in this sense is one of the most important market signals. It increases when investors have to fear that they will not get their money back as promised. A high risk premium, meanwhile, will spur debtors to do everything they can to regain investors’ trust. If this is prevented – for example, by the ECB purchasing high-risk government bonds from countries on the southern front – debtors will reduce their efforts and thus lose further competitiveness. – The compensation for expected reduction in the value of money included in the interest rate, also called term premium. – Discount in credit default swap trading. High premiums indicate a correspondingly poor credit rating for the underlying instrument. – The difference between the expected return on a financial security and the return on the risk-free asset, such as a prime rated government bond. – The difference between the expected return on a financial security and the return on the risk-free asset, such as a prime-rated government bond (benefit that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default). – See cost of equity, profit expectation, term premium, outright transactions, monetary policy, Ricardo effect, speculation, destructive, interest rate, crude, tremor premium. – Cf. ECB Monthly Bulletin of December 2006, pp. 34 et seq. (risk premia and yield curve; overviews), ECB Monthly Bulletin of April 2007, pp. 30 et seq. (risk premia in the euro area since 1999; overviews), Deutsche Bundesbank Monthly Bulletin of August 2014, pp. 31 et seq. (meaningfulness of the respective risk premium on the money market).

The risk premium in this sense is one of the most important market signals. It increases when investors have to fear that they will not get their money back as promised. A high risk premium, meanwhile, will spur debtors to do everything they can to regain investors’ trust. If this is prevented – for example, by the ECB purchasing high-risk government bonds from countries on the southern front – debtors will reduce their efforts and thus lose further competitiveness. – The compensation for expected reduction in the value of money included in the interest rate, also called term premium. – Discount in credit default swap trading. High premiums indicate a correspondingly poor credit rating for the underlying instrument. – The difference between the expected return on a financial security and the return on the risk-free asset, such as a prime rated government bond. – The difference between the expected return on a financial security and the return on the risk-free asset, such as a prime-rated government bond (benefit that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default). – See cost of equity, profit expectation, term premium, outright transactions, monetary policy, Ricardo effect, speculation, destructive, interest rate, crude, tremor premium. – Cf. ECB Monthly Bulletin of December 2006, pp. 34 et seq. (risk premia and yield curve; overviews), ECB Monthly Bulletin of April 2007, pp. 30 et seq. (risk premia in the euro area since 1999; overviews), Deutsche Bundesbank Monthly Bulletin of August 2014, pp. 31 et seq. (meaningfulness of the respective risk premium on the money market).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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