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. 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.
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.
List of Risk Free Assets
Below is a list of the 5 best “risk free” assets and their average return rates in 2019. Anyone on of these can be considered risk free because over the course of history, they have never been defaulted on with the help of the US government.
- Savings accounts (2-3%)
- Savings bonds (1-2$)
- Certificates of deposit (2-3%)
- Money market funds (4-5%)
- Treasury bills, notes, bonds (2-5%)
It’s recommended that everyone has a form of of of these “investments”. In reality, these are more of a savings than an investment, but they still return, at minimum, the inflation of money.