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.
Jumbo CDs are considered a "volatile" liability because relatively large uninsured balances and short maturities force issuing banks to match yields (risk-free rates plus default premiums) available in the money market or lose the funding.
Fama, 1986, "Term Premiums and Default Premiums in Money Markets", Journal of Financial Economics, 17:175-196
Then the current value of a loan will equal its face value plus the present value of expected default premiums minus the present value of the expected losses.
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.
The spread changes significantly in response to changes in the business cycle, the general level of interest rates, problems in the banking industry, and monetary policy and institutional changes and there is evidence of the existence of significant default premiums in CD rates [Baer and Brewer, 1986; Fama, 1986; Hannan and Hanweck, 1988; Ellis and Flannery, 1992].(2) Thus, DCDTB is considered an adequate indicator of changes in the perception of the risk of the banking industry beyond the economy-wide default risk captured by DPREM.
If we allowed the government to break its contractual promises without having to pay compensation, such a policy would come at a high cost in terms of increased default premiums in future government contracts and increased disenchantment with the government generally.(61) As with incentive subsidies, whether those costs would outweigh the benefits from the additional flexibility that is gained by permitting the government to disregard its contractual obligations is an empirical question that I do not pretend to answer with any certainty.
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.
Ng, 1991, "Default Premiums in Commodity-Markets--Theory and Evidence", Journal of Finance, 46:1071-1093
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.
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.