The risk premium (additional return) that investors expects to earn from investing in a foreign country as a compensation for the higher amount of risk of investing in the businesses or assets based in that country. For example, bond investors would demand higher returns on their purchases of sovereign bonds issued by the government of a foreign country, being the difference between the interest rate of a country’s bonds and that attached to bonds issued by a “riskless” benchmark country. Likewise, for a business operating in a foreign country, country risk premium constitutes the additional returns that business is projected to generate compared to a benchmark or model country that is considered risk-free.

In calculation, this premium is an upward adjustment to the discount rate that is applied to businesses (or asset holdings) that operate overseas. The country risk premium is determined based on a set of factors including a respective country’s credit rating, default spread, political stability, etc.

It is known for short as CRP.