risk premium investment & finance definition

The amount of return that buyers demand above a theoretical risk-free return. The risk premium explains the difference in the expected return among similar securities. For example, investors will be willing to buy an A-rated bond that pays a lower interest rate because it has less risk than a B-rated bond, which is riskier. The issuer of a B-rated bond has to pay a higher interest rate in order to attract buyers to make up for the greater risk.