We have been hearing news about the risk premium for a few days, in fact yesterday we read that the risk premium had closed at 539 basis points, its all-time high. But….
What is the risk premium?
In the public debt market, the risk premium, also known as the debt spread , is the premium that a country pays to finance itself in the markets compared to other countries. In this way, the higher the country risk , the higher your risk premium and the higher the interest rate on your debt .
In other words, it is the profitability that investors demand ( interest ) from a country to buy its sovereign debt compared to that demanded from other countries. The risk premium thus means investors' confidence in the soundness of an economy. (Source: Wikipedia )
The Spanish risk premium measures the differential between the yield of the German ten-year bond and its national equivalent. That is, if an investor is going to buy Spanish bonds with a maturity of 10 years, they will take as a reference the German bonds with the same maturity and on which there is no doubt about their repayment, and will ask for an extra cost for buying the Spanish bonds.
The investor will buy Spanish bonds and this implies a greater benefit in exchange for assuming greater risk and Spain, a higher cost to obtain financing.
We leave you this video by José Mª O´Kean, who is Professor of Economics (Pablo de Olavide University, Seville) and Professor of Economic Environment (IE Business School, Madrid), in which he explains very clearly in just over three minutes what is the risk premium.
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