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Default premium

• A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.

• Default Premium is the promised payment times the probability of default. To calculate the default premium we can compare the yield on the bonds with the yield on risk-free Treasury bonds with the same maturity. For instance, if some bonds yield 11%, and the same maturity Treasury bonds yield 10%, then the default premium is 1%.

 
 Embedded terms in definition
 Bond
Corporate bond
Default
Investor
Maturity
Premium
Probability
Risk
Treasury bond
Yield
 
 Related Terms
 

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