Default 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.

Default Premium

The return over and above the risk-free rate of return that an investor demands in exchange for accepting the risk inherent to an investment. The default premium becomes larger with greater amounts of risk. For example, an investment grade bond has a lower default premium than a junk bond, which carries more risk, but a higher premium than a Treasury security, which is riskless.
References in periodicals archive ?
Junk bond spreads and credit default premiums are at their lowest levels since before the Lehman Brothers collapse; but they are still well above the levels seen before the financial system began to come apart in 2007.
Specifically, we generate risk rankings using jumbo CD default premiums and quarter-over-quarter withdrawals for banks with satisfactory supervisory ratings.
The first step in assessing the value of jumbo CD data was obtaining default premiums for all sample banks with satisfactory supervisory ratings.
Swap rates are compared to yields on equal maturity bonds to measure default premiums.
With the above reasoning in mind, our null hypothesis in testing for default premiums in bid-ask spreads for yen-dollar currency swaps is that par bond yields exceed swap rates.
Their results further show that such fluctuations may depend, to a large extent, on whether the observed default premiums on such instruments fully reflect the premiums demanded by investors.
We show later in this paper that the conventional contingent claims model due to Merton |18~ is unable to generate default premiums in excess of 120 basis points, even when excessive debt ratios and volatility parameters are used in the numerical simulation.
However, Fama |11~ reports a negative relationship between average default premiums and maturities for short-term money market securities.
Default premiums and yields on risky assets is still significantly inflated from last year's lows despite government guarantees and liquidity.
The VIX and DailyFX Volatility indexes have both maintained their decline, default premiums are still in a long-term bear trend (though they recently jumped) and the yield advantage on relatively risky assets has lessened with growing interest.
The VIX is just off its nine-month lows, the Bloomberg-derived Junk bond spread has extended its steady depreciation to October lows and credit default premiums are near their lowest levels in nearly a year.
In contrast, junk bond spreads and credit default premiums are climbing.