Consider the case of a simple one-period framework.If i = 12.30% and k = 13.87%, what is the risk premium on the corporate loan (round to two decimals)?
A)13.87% - 12.30% = 1.57%
B)13.87% * 12.30% = 0.0171 = 1.71%
C)13.87% / 12.30% = 1.13%
D)The risk premium equals k = 13.87%

Question

Quizplus · Accepted Answer

The risk premium is calculated as the difference between the corporate loan rate (k) and the risk-free rate (i). Therefore, the risk premium is 13.87% - 12.30% = 1.57%. Option A is the correct answer. Option B uses an incorrect formula. Option C calculates the ratio of k to i, which is not the same as the risk premium. Option D is incorrect as it equates the risk premium to the corporate loan rate, which is not correct.

Consider the Case of a Simple One-Period Framework