Risk premium is the excess earnings (added gain) that investors seek for their risks for investments with risks such as equity investment. It is also referred to as expected additional revenue depending on the risk. Investment, if it is the same as the 1% investment results of one year of equity investments interest rates of bank deposits are at risk as is 1%, rational investors to deposit all of the money in bank deposits become. This is because stocks are more risky for price declines due to fluctuations in stock prices than deposits, so they will be incompatible with the risk of equity investment. In addition to bank deposits as low risk assets, call rates (uncollateralized overnight call rates) are representative as yields in riskless assets in Japan, and Treasury Bills interest rates are often used in the United States it is. These rates are called risk free rates. The profitability required by investors for each investment product is called the expected rate of return, but the expected rate of return increases with the risk of investment products. That is because the risk premium is added to the expected rate of return.
Risk premium is proportion of profit on the magnitude of risk
When purchasing financial products, we want to avoid the risk of losing the principal fee if possible, so we tend to choose products with low risk. Risk premium represents the proportion of profit on the magnitude of risk, so risk increases for products with large risk premiums, but you can expect to recover profits that exceed that. If the number of customers who think that it is better to avoid risk as much as possible continues, the risk premium tends to rise because the risky financial products are not often handled. The risk premium is used in various situations, but the fixed rate is set higher for the fixed loan rate than the floating rate, such as for the mortgage loan, if the fixed interest rate is chosen in the case that the bank side selects the case It will be subject to interest rate fluctuation risk. It can be said that interest rate differential between fixed interest rate and variable interest rate is risk premium. Knowing the principle of risk premium makes it easier to consider financial products that can make more profitable. Even if it is difficult to make a massive profit normally, you can expect a profit more than the risk of losing the principal by raising the risk premium or not having customers who tend to avoid risks or by applying a reasonable amount to high-risk products You can do business you can do.