... pay to avoid risk or take it; thus, risk will not affect his decisions. On the whole for this discussion we will be talking about the risk averse investor as this is the vast majority of the lending population. An investor that is risk averse will require some sort of compensation in order to take a more risky option than they otherwise would. For instance, when considering equities and bonds, anticipated income from equities is less certain than bond income. This is because equity income varies over time and also, in times of crisis, equity claims are below that of bonds in the pecking order. Therefore, investors must be offered additional returns per year to tempt them into buying the higher-risk equities instead of the lower-risk bonds. This trend will continue with risk and compensation being very strongly correlated. The risk seeker will not follow this trend and will pay to ...

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