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Why Does the Default Risk Premium Vary Over the Business

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Why does the default risk premium vary over the business cycle?


Definitions:

Market Risk Premium

The excess return that investors require for choosing a risky investment over a risk-free one.

Excess Return

The return on an investment that exceeds the return on a risk-free asset such as a Treasury bond.

Risk-Free Asset

A secure financial asset offering a promised payoff without any chance of losing money, commonly found in the form of government bonds.

Lithium-Base Grease

A type of lubricant made from lithium soap, used for its high resistance to extreme temperatures and water washout.

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