Question at position 5 A risk premium is a spread on top of the risk-free rate which uses a baseline of US Treasuries.TrueFalse

Question

Question at position 5 A risk premium is a spread on top of the risk-free rate which uses a baseline of US Treasuries.TrueFalse

BlackTom AI · Accepted Answer

Consider the concept being tested: what defines a risk premium in relation to a baseline interest rate.
Option 1: True. A risk premium is indeed the extra yield or spread above a risk-free rate to compensate lenders or investors for taking additional risk. In many financial contexts, the risk-free rate is represented by US Treasuries, and the premium is added on top to reflect credit risk, liquidity risk, or other uncertainties. This aligns with standard definitions where the baseline is a risk-free benchmark like Treasuries and the total rate equals risk-free rate plus risk premium.
Option 2: False. If you claim that a risk premium does not use Treasuries as a baseline, you would be misidentifying the common baseline reference for the risk-free component. While other baselines could conceptualize risk premiums in certain models, the conventional and widely accepted framework uses a risk-free rate (often Treasuries) plus a premium to capture risk. Therefore this statement would contradict the standard understanding of how risk premiums are constructed.
In summary, the idea that a risk premium is a spread on top of the risk-free rate, with Treasuries serving as the baseline, correctly captures the typical definition used in finance. The alternative view misstates the relationship by denying the baseline role of the risk-free rate or by implying a fundamentally different construction for risk compensation.

Question at position 5 A risk premium is a spread on top of the risk-free rate which uses a baseline of US Treasuries.TrueFalse

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