![]() There are often country-specific risks and industry-specific risks like regulations that can impact the default risk of a company. In reality, there are far more variables at play that can determine the interest rate charged than the risk of default. However, please note the formula described above is a simplified variation meant to help conceptualize how the risk of default is priced into the interest rate by lenders. Treasury bond is yielding 3.0%, the default risk premium is 3.0% the excess yield over the risk-free rate.įor example, if the yield on a corporate bond is 6.0% while a comparable U.S. the yield received by providing the debt capital, is subtracted by the risk-free rate (rf), resulting in the implied default risk premium, i.e. The interest rate charged by the lender, i.e. The formula for estimating the default risk premium is as follows.ĭefault Risk Premium (DRP) = Interest Rate – Risk-Free Rate (rf)
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