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Any country's economy experiences fluctuations in its economic activities throughout time, and these fluctuations, or upswings and downswings, are referred to as business cycles or growth and recession. During an expansion, the economy grows in real terms, whereas during a recession, the economy contracts.

During expansions, the risk premium falls, but during recessions, it increases.

During a boom or expansion period in the economy, the risk premium is smaller; very few businesses will go bankrupt during this time. As a result, there are fewer risks of corporate bonds defaulting, lowering the risk premium.

During a recession, however, the risk premium is higher; a huge number of businesses will go bankrupt during this time. As a result, there is a greater danger of corporate bonds defaulting, raising the risk premium. As a result, the risk premium is anti-cyclical, rising during a downturn and falling during an expansion.