Country risk included in the risk premium in interest rates refers to the:

a. additional costs incurred when loans are made in currencies other than the domestic currency.

b. possibility that loans in some countries may not be repaid because of political upheaval.

c. expectation that the exchange rate may change in the future.

d. potential change in the terms of trade between countries.

Question

Business

Brandy

28 April, 21:11

Country risk included in the risk premium in interest rates refers to the:

a. additional costs incurred when loans are made in currencies other than the domestic currency.

b. possibility that loans in some countries may not be repaid because of political upheaval.

c. expectation that the exchange rate may change in the future.

d. potential change in the terms of trade between countries.

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Answers (1)

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Gemma Clay · Answer 1

The correct option here is B) the probability of loans not getting repaid in some countries because of political upheaval.

Explanation:

The risk premium is a return on investment that one expects it will yield, this is the return which is in excess of risk free rate of return.

In the risk premium for interest rate it includes both country risk and future exchange rate changes. Where country risk refers to a situation where there is a good chance that loans in some countries won't be repaid due to the political upheaval.