A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield; an asset’s risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment. For example, high-quality corporate bonds issued by established corporations earning large profits typically have very little risk of default. Therefore, such bonds pay a lower interest rate, or yield, than bonds issued by less-established companies with uncertain profitability and relatively higher default risk.
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