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The risk premium measures: 14 the interest paid on a U.S. government bond. the total interest rate paid on a financial asset.

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1. d) the extra interest paid on a risky financial asset; risk premium is the return on an investment minus the return that would be earned on a risk free investment. The risk premium is the amount that an investor would like to earn for the risk involved with a particular investment.

2. d) the risk premium will be higher because the risk of default is greater; During business cycle booms, fewer corporations go bankrupt and there is less default risk on corporate bonds, which lowers their risk premium. Conversely, during recessions default risk on corporate bonds increases and their risk premium increases. The risk premium on corporate bonds is thus anticyclical, rising during recessions and falling during booms.

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