Default Premium

Default Premium

The additional amount a borrower must pay to compensate the lender for assuming default risk.

Notes:

The default premium is paid by companies with lower grade bonds or by individuals with poor credit. As an illustration, companies with poor financials will tend to compensate investors for the additional risk by issuing bonds with high yields. And individuals with poor credit must pay higher interest rates in order to borrow money from the bank.

See also: Default, Default Risk, Premium

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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. Often the premium is measured as the yield over and above a government bond yield of similar coupon and maturity.