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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