It is define as that "there is no guarantee that a bond issuer will make the payment which he promised.
When there is higher default risk the higher the probability that those who have the bond will not receive the promised payments and thus higher the yield.
The investor which are risk averse require some compensation for risk, more compensation is require for higher risk.For example
Which makes a payment to the insured's beneficiaries upon the death of the policy holder.
Company can get group insurance for their employees.
It is combination of life insurance and fix saving account.
We pay fix amount for a fixed period of time and in case of death of policy holder his/her beneficiary gets the money.
If the policy holder decides to discontinue the policy
Transaction Demand for money: The quantity of money people hold for transaction purposes is called transaction demand for money. It depend on following factors
Nominal income of people: As the nominal income increases spending increases which causes
an increase in the demand for money holding.
Cost of holding money: The cost of money holding is the interest foregone in holding the money in hand. So if the nominal interest rate is higher people will prefer keeping money in banks etc so demand for money holding decreases.
Availability of substitutes: If people have cheaper alternative means of payment they will hold less money.
Portfolio Demand for Money: Money is one instrument that people can hold in their investment portfolio. The demand for holding money in portfolio is dependent on following factors:
Wealth: An increase in wealth increases the demand for money Return on alternative investments: As the return on alternative investments fall people hold more money.
Expected future interest rate: An increase in expected future interest rate increases holding demand for money
Riskiness of alternatives: Riskier the alternative investments greater the demand for money.
Liquidity: If alternative investments become more liquid demand for money decreases
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