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.
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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.
To calculate default risk premium, subtract the rate of return of a risk free asset from the rate of return on the asset being considered.
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?
- First, determine the return rate of your asset.
Calculate or estimate the annual return of the asset being invested in.
- 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%.
- Finally, calculate the default risk premium.
Using the formula above, calculate the default risk premium.
FAQ
A default risk premium is defined as the difference between the return on an asset and the return on a risk-free asset.
