A risk premium is additional interest,in excess of the market rate,that a bondholder receives in order to compensate him for

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Quizplus · Accepted Answer

A risk premium is a compensation for taking on risk, and in this case, it is specifically compensation for default risk. It is the additional interest that a bondholder receives above the market rate to account for the increased probability that the borrower will default and the bondholder will not receive their principal back. Option A is incorrect because systematic risk is the risk of the entire market or economy, and is not specific to a particular bond. Option B is incorrect because inflation risk is also not specific to a particular bond, and refers to the possibility that inflation will decrease the purchasing power of any money received from the bond. Option D is incorrect because bond discount refers to the difference between the face value of the bond and the price at which it is sold, and is not related to the risk premium.

A Risk Premium Is Additional Interest,in Excess of the Market