The Relationship between Interest Rates and Risk Premiums

Interest Rates, Risk PremiumsWhile making an investment, it is very important to understand that there is a relation between rewards and the risks. When a risk is assumed in a certain stock investment, a reward is anticipated as well. In order to make it up for the risk, you have to make sure that the reward is appropriate and worthy enough. There are certain return policies that are known as “risk free” which could be found in the current market.

A reward that is free form risk in the Treasury bond of interest of as much as five percent could be the baseline for you to measure the reward. Therefore, go for those risks involved investments that would give a return, which is more than the basic five percent. The amount that you will receive as the return over the five percent baseline can be considered as the premium of your risk. Therefore, this is the basic relation between interest rates and risk premiums.

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