Risk premium

In the context of a fixed income benchmark, there are three principle sources of risk: duration (a function of interest payments and time, which is affected by changes in interest rates – or payment terms), credit and currency. Each bond or instrument in a benchmark is explicitly or implicitly priced by the market for each of these risk factors. The degree to which the implied or actual price for any one of factors exceeds the risk-free rate is known as the risk premium.

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