## About Default Risk Premium Calculator (Formula)

The Default Risk Premium (DRP) is the additional return an investor expects to receive for taking on the risk of default on a particular investment. It’s calculated by subtracting the risk-free rate of return from the expected return of the investment:

**DRP=RRA−RRT**

Where:

- $DRP$ stands for Default Risk Premium.
- $RRA$ represents the Return Rate of Risk-Free Asset.
- $RRT$ represents the Return Rate of the Proposed Investment.

Here’s a brief explanation of each variable:

**Return Rate of Risk-Free Asset ($RRA$):**This is the theoretical return an investor would expect to receive from a risk-free investment, meaning an investment with no possibility of default. It serves as a benchmark for comparing the returns of riskier investments.**Return Rate of the Proposed Investment ($RRT$):**This is the expected return from the specific investment being considered. It reflects the potential return as well as the associated risk of default.

The Default Risk Premium essentially quantifies the extra return an investor demands for taking on the additional risk of default that comes with the proposed investment, compared to a risk-free investment.

For example, if the return rate of a risk-free asset is 3% and the expected return of a proposed investment is 5%, the Default Risk Premium would be $5%−3%=2%$. This means investors are demanding an additional 2% return for the added risk of default associated with the proposed investment.