The default risk premium reflects the fact that ____.
A) the premium remains constant over time
B) there is a positive relationship between risk and maturity
C) there is a positive relationship between default risk and required returns
D) the premium varies depending on the time to maturity

Question

Quizplus · Accepted Answer

The default risk premium is the difference between the return offered by a risk-free investment, such as government bonds, and the return required by an investor for holding a riskier investment, such as corporate bonds or stocks. The premium reflects the fact that investors demand higher returns for taking on default risk. Therefore, there is a positive relationship between default risk and required returns. The premium may vary depending on the issuer's creditworthiness, but it is not necessarily related to the time to maturity or constant over time.

The Default Risk Premium Reflects the Fact That ____