This should be kept uppermost in mind as central bankers respond to the credit crunch coming out of the so-called subprime squeeze (which is actually a worldwide risk-premium reset).
That's called a risk-based premium structure, and it'll be something new for FHA. And homeowners who have fallen behind on their subprime mortgages can now try to refinance with an FHA-insured mortgage.
And by reducing the currency-risk premium that investors demand for holding kiwi dollars, it would lower real interest rates.
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"They've been unfairly tarnished with the Italian equity-risk premium, " he says.
IR The puzzle of the equity-risk premium (Economics focus, July 15th) highlights a topic that we have been researching and it poses, but does not answer, an important question: how can one reconcile high investor expectations with a declining equity premium?
Long-term nominal interest rates are influenced by many things, including investors' expectations of inflation and future short-term rates, and a risk premium for holding long-term assets.
They do so by figuring out for all their candidates an "equity risk premium"--the amount of return (appreciation plus dividends) they want over safe ten-year Treasury bonds, based on their best guess.
The remaining yield on longer-term bonds is a risk premium that is commensurate with U.S. interest-rate volatility (Japanese risk premiums are lower, but they also have nearly zero interest-rate variability).
But the clean-up has had unintended consequences: post-revolution bribes are said to have gone up, thanks to a risk premium added by unreconstructed mid-level officials.
Instead of declining, the risk premium on the non-defaulting bonds would increase to 707 basis points.
In addition, a cap on interest rates offered by banks--less than 10%--virtually eliminates the risk premium associated with energy efficiency investments.
Its level reflects all sorts of things, including demand from investors for bonds, expectations of future inflation and a risk premium for holding longer-term assets.
The expected credit risk premium over inflation from investment-grade securities is also expected to remain stable.
FORBES: Portfolio Solutions' 30-Year Market Forecast for Investment Planning (2013 edition)
In that case, the double dip fear could continue hanging over the market, preventing the reduction in risk premium assumed in our non-recession scenario.
Banks should like it because interest-only mortgages earn a premium rate and they get to lock in low-risk assets at their current depressed values.
After adjusting for these factors, the authors argue that the best estimate of the equity risk premium worldwide in future is 4-5 percentage points.
From the other side, supporters of the shift to austerity believe it is both essential and appropriate: deficit spending cannot go on for ever, and by boosting firms' and households' confidence and lowering the risk premium on government debt, well-designed fiscal consolidation can actually boost growth.
Essentially, investors have demanded a six-percentage point premium for taking the risk of investing in equities.
Even amid falling prices, drug producers continue to profit from the risk premium that prohibition puts on their multi-billion dollar industry.
There would, on the other hand, be a useful fall in interest rates, because investors would no longer demand a premium for the risk that the exchange-rate peg would be broken.
Long bonds usually have higher coupons than short ones, as investors demand a premium for exposure to the risk of interest-rate rises and inflation.
So Automatic Data Processing, a low-risk company, gets assigned a 4.5 point premium.
Pricing is important, because PBC transfers resource-management risks to suppliers, which must decide what risk premium customers should pay.
This is assumed to be the average post-crisis cost of long-term funds to Ireland that incorporates both a term and risk premium.
FORBES: How Much Would Ireland Benefit from Replacing the Promissory Notes with a Long-Term Bond?
Risk-free profits are captured by APs when a measurable ETF price discount or premium exists.
The reasonable funding levels for elite venture and growth managers, coupled with the concentration of premium deal flow to those managers, will generate the most attractive risk-adjusted returns.
The risk premium in financial markets comes in as Treasury yields move up and fewer below-investment-grade debentures stop trading like yesterday's sardines.
To capitalize this entrepreneurial approach, the banks should be able to sell these higher-yield, lower-risk mortgages to be bundled into bonds that investors would find attractive because of the premium yield, stable revenue stream, and equity kicker.
The semiconductor and equipment industry normally trades at a premium to the market, when measured in terms of the relative valuation of risk-adjusted EVA performance.
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Arguments about the risk premium, earnings prospects and other new factors (demographic shifts, the spreading share-owning culture, and others besides) were accepted far too uncritically in the late 1990s.
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