Firms face markup risk, which is associated with the premium added on the reference rate (e.g., prime rate) to compensate the bank for risk.

Question

Quizplus · Accepted Answer

Markup risk refers to the uncertainty or risk associated with the premium (markup) that a bank adds to the reference or base interest rate (like the prime rate) when lending money. This premium compensates the bank for the risk of the loan. Changes in this markup can affect the cost of borrowing and the bank's profitability.

Firms Face Markup Risk, Which Is Associated with the Premium