Credit Risk Premium
Short definition
The credit risk premium is the extra yield lenders require above the risk-free rate for default and expected loss. The observed credit spread embeds this premium and may also carry liquidity and tenor premia.
Detailed explanation
Firm premium must be kept separate from sovereign premium. If local Rf already embeds sovereign default, adding CRP into Kd double-counts. Ratings tabulate the premium; CDS is the market price of the same risk.
A wider spread lifts WACC’s debt leg independently of Ke. In distress, observed YTM also embeds expected loss; that Kd is no longer a promised yield.
Why it matters for the CFO
New loans, bond issues and Kd in WACC come from this premium. When “rates fell but spreads opened”, all-in cost may not fall.
How it is calculated
Kd ≈ Rf + kredi risk primi (+ likidite / vade primi)
Variables in the formula
- Kd: Pre-tax cost of debt
- Rf: Risk-free rate (same currency)
How to read it
A 400 bp spread on Rf 20% is a rough Kd near 24%; fees and reserve requirements push all-in up. There is no universal “normal spread”; sector, collateral and the cycle set it.
Numerical example
Rf 22%, credit risk premium 6 percentage points, fees 0 → rough Kd = 28% (pre-tax).
Related calculators
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.