Country risk premium
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
An additional risk premium added to discount rates for investments in emerging or volatile jurisdictions.
Country risk premium in plain English
When you invest in a project in a shaky country — one with political turmoil, unstable money, or weak courts — there's an extra chance things go wrong that you wouldn't face in a calm, stable place. The country risk premium is the extra reward investors insist on to accept that added danger. Think of lending your bike to a careful friend versus one who's always crashing: you'd demand something extra from the second. In finance you "demand extra" by using a higher discount rate, which lowers how much you're willing to pay today for the future payoffs from that risky place.
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