Risk Discount

DEFINITION of 'Risk Discount'

A situation where a particular investor, either an individual or firm, decides to receive less of a return on their investment in exchange for less risk. The risk discount is the exact opposite of the risk premium, and the degree to which any one person chooses the amount of the discount will vary by person to person.

BREAKING DOWN 'Risk Discount'

The degree to which someone chooses to exchange return for risk will depend on their individual risk tolerance. Those who choose to take a risk discount versus a risk premium are people who are very risk adverse.

For example, an investor who decides to take the risk discount may choose to purchase a high-grade corporate bond with a yield to maturity (YTM) of 5%, while an equivalent bond from another firm has a YTM of 5.25%. This investor may perceive the lower yielding bond as a safer investment, and choose to take the risk discount.

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RELATED FAQS
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    Let’s say a corporate bond who was quoting 95 is now quoting 70 because of increased fear regarding the company. The ... Read Answer >>
  2. What is the difference between yield to maturity and the spot rate?

    Find out how yield to maturity and spot rate calculations use different discount rates to determine the present market value ... Read Answer >>
  3. All of the following are true concerning the Yield-to-Maturity (YTM) of a bond EXCEPT ...

    The correct answer is d): YTM is the promised rate of return an investor will receive from a bond at the current market price ... Read Answer >>
  4. What is the difference between the cost of capital and the discount rate?

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  6. The risk an investor is most likely to face when investing in a discounted U.S. Treasury ...

    a. Call risk b. Reinvestment risk c. Credit risk d. Purchasing power risk Answer: Bbecause call risk would apply more often ... Read Answer >>
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