The default risk premium represents the difference in yield between a risk-free security, such as a government bond, and a security with credit risk, such as a corporate bond.
The default risk premium is affected by a number of factors, including the creditworthiness of the borrower, the level of interest rates, the term of the debt, and the overall economic and market conditions. A higher default risk premium indicates that investors perceive a greater risk of default and are demanding a higher return to compensate for that risk.
For example, if a government bond has a yield of 2% and a corporate bond with the same maturity has a yield of 4%, the default risk premium is 2%, indicating that investors are demanding a higher return to compensate for the additional risk of default associated with the corporate bond.
Overall, the default risk premium is an important concept for investors to understand as it helps to determine the relative attractiveness of different investment opportunities and can provide insight into the overall level of risk in the market.