Risk premium

Risk premium is the extra return a lender or investor requires above the risk-free rate to compensate for the risk of a shipping exposure. For debt it shows up as the margin or spread over the benchmark rate; for equity it is the excess of expected return over a government bond yield, reflecting the cyclicality of freight markets, asset-value volatility, and single-name credit risk. Shipping has long commanded a higher premium than less volatile sectors because earnings swing with the cycle and vessel values can halve. The premium feeds the discount rate used in vessel and project appraisal.