Default Risk Premium Calculator

Formula

The formula to calculate the default risk premium is:

\[ DRP = RRA - RRT \]

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 (e.g., a treasury bond)

What is Default Risk Premium?

In short, the default risk premium 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. It is calculated by subtracting the rate of return of a risk-free asset from the rate of return on the asset being considered.

Example Calculations

Example 1:

Rate of Return of the Asset (RRA): 8%
Rate of Return of a Risk-Free Asset (RRT): 3%

Using the formula:

\[ DRP = 8 - 3 = 5\% \]

Example 2:

Rate of Return of the Asset (RRA): 12%
Rate of Return of a Risk-Free Asset (RRT): 4%

Using the formula:

\[ DRP = 12 - 4 = 8\% \]