Defaults now seemed more likely, so the prices of the securities fell as their expected values fell. This is not what risk averse means. What happened in 1998 was that investors changed their assessment of how big the risks were. So the price you would pay for that security will be much lower, even without any change in your attitude toward risk, which is what risk aversion is about. In the example above, Country X is, in effect, paying a higher interest rate because its bills are risky.
Riskier borrowers have to pay higher interest rates.
The follow-up tutorial is about risk aversion . The views and opinions expressed in this page are strictly those of the page author. The contents of this page have not been reviewed or approved by the University of South Carolina.