What is the name of the additional return required by investors to compensate for the risk of default on a bond?

The additional return required by investors to compensate for the risk of default on a bond is known as the Default-Risk Premium. This premium reflects the likelihood that the bond issuer may fail to make required interest payments or repay the bond's principal at maturity. Investors demand this additional return as compensation for taking on the extra risk associated with bonds that are perceived as having a higher probability of default compared to less risky investments, such as government securities.

When evaluating bonds, understanding this premium is crucial, as it allows investors to differentiate between the yields on bonds with varying levels of credit quality. For instance, a bond rated lower on the credit scale would typically have a higher default-risk premium compared to a highly rated bond, reflecting this additional risk. This premium is a vital part of the overall yield that an investor expects to earn from a bond investment, influencing their decision-making process when selecting bonds for a portfolio.