The ________ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

Question

Quizplus · Accepted Answer

The definition given in the question perfectly matches the concept of default risk, which is the possibility of nonpayment by the bond issuer. The default risk premium is therefore the additional return investors require for taking on this risk. The other answer choices are related to different concepts: interest rate risk refers to the impact of interest rate changes on bond prices, taxability refers to whether bond income is subject to taxes, liquidity refers to the ease of buying or selling a bond, and inflation refers to the erosion of purchasing power over time.

The ________ Premium Is That Portion of a Nominal Interest