Question

Selecting a CD. Casey has $1,000 to invest in a certificate of deposit. Her local bank offers her 2.5% on a 12-month FDIC-insured CD. A nonfinancial institution offers her 5.2% on a 12-month CD. What is the risk premium

Answer 1

Answer: 2.7%

Explanation:

A risk premium simply means the investment return thstna particular asset will be expected to yield which is in excess of the assets risk-free rate of return.

The risk premium will be:

= Total return - Risk free rate

= 5.2% - 2.5%

= 2.7%

Therefore, the risk premium is 2.7%.