Default Risk Premium Calculator

Enter the rate of return for a risk free asset and the rate of return of the asset you wish to price into the default risk premium calculator below.

Default Risk Premium Formula

The formula use in the default risk premium calculator above is as follows:

DRP = RRA – RRT

  • Where DRP is the default risk premium
  • RRA is the rate of return of the asset you are investing in
  • RRT is the rate of return of a risk free asset i.e. a treasury bond.

Default Risk Premium Definition

In short, this value is a representation of the risk associated with an investment when compared to something like a treasury bond that has, in theory, almost no risk.

How to calculate default risk premium?

How to calculate default risk premium?

  1. First, determine the return rate of your asset.

    Calculate or estimate the annual return of the asset being invested in.

  2. Next, determine the rate of return of a risk free asset.

    This is typically something like a savings bond and they usually return 1-2%.

  3. Finally, calculate the default risk premium.

    Using the formula above, calculate the default risk premium.

FAQ

What is a default risk premium?

A default risk premium is defined as the difference between the return on an asset and the return on a risk free asset.

default risk premium calculator