Jump to content

Econ people...risk premium vs yield question


Aaron

Recommended Posts

How can the risk premium increase greater than the yield?

 

Lets say you have a 0 risk bond @ 2%, a risky bond @ 5% and the risk premium is therefore 3%.

 

Risk increases on the risky bond by 1%, yet the risk premium increases by 1.5%. Why does it increase more than 1%?

 

I know its a long shot, but oh well.

 

Thanks guys.

Link to comment
Share on other sites

ah i took macro econ last year at ohio state. damn i hated it. couldnt understand my professor as he was from the middle yeast or something.

 

ahahahahahaha

 

 

 

This is Econ 520 Money and Banking. I am taking Econ 502 (Macro) also. I took 201 (intro macro) about 5 years ago.

Link to comment
Share on other sites

I took macro and micro. Ugghhhh, I hate business classes.

 

Why does the risk only increase 1%?

If you're doing average than it would increase by 1.5% to 3.5 instead of 3.

 

I don't know what you figured out and what info was given to you.

 

All of this was given. The question was why does risk premium increase more than the increased risk?

 

Answer is that when risk of the risky bonds increases, money is shifted from risky bonds to riskless bonds. In doing so, the interest rate of the risky bonds increases, and because more people want riskless bonds, their rate decreases.

 

Risk premium is the difference between the 2 assets. So if one increases by 1%, and the risk premium is 1.5%, the other asset decreased by 0.5%.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

×
×
  • Create New...