Preview

Bond Ratings and Default Spreads for Different Countries

Good Essays
Open Document
Open Document
1037 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Bond Ratings and Default Spreads for Different Countries
Bond Ratings and Cost of Debt

This table summarizes the latest bond ratings and appropriate default spreads for different countries. While you can use these numbers as rough estimates of country risk premiums, you may want to modify the premia to reflect the additional risk of equity markets. To estimate the long term country risk premium, I start with the country rating (from Moody's: www.moodys.com) and estimate the default spread for that rating (US corporate and country bonds) over the treasury bond rate. This becomes a measure of the added country risk premium for that country. I add this default spread to the historical risk premium for a mature equity market (estimated from US historical data) to estimate the total risk premium. In the short term especially, the equity country risk premium is likely to be greater than the country's default spread. You can estimate an adjusted country risk premium by multiplying the default spread by the relative equity market volatility for that market (Std dev in country equity market/Std dev in country bond). I have used the emerging market average of 1.5 (equity markets are about 1.5 times more volatile than bond markets) to estimate country risk premium. I have added this to the historical premium for the US of about 4.51% to get the total risk premium.

| |Long-Term Rating |Adj. Default Spread |Total Risk Premium |Country Risk Premium |
|Country | | | | |
|Alderney |Aaa |0 |4.51% |0.00% |
|Andorra |Aaa |0

You May Also Find These Documents Helpful

  • Good Essays

    Cap/Gm 581

    • 533 Words
    • 3 Pages

    Secondly, the organization should conduct an extensive country risk analysis before embarking on an expansion plan in a new foreign market. The country risk analysis will cover a wide range of areas include political and socio-cultural risks, financial risks, competitive risks and legal risks, etc. It will provide a strong insight about the relative attractiveness of doing business in the foreign market.…

    • 533 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    adm3351 week1 notes

    • 2079 Words
    • 5 Pages

    INTRODUCTION This introductory chapter will focus on the fundamental features of bond, the type of issuers, and risk faced by investors in fixed-income securities. Bond A bond is a debt instrument requiring the issuer to repay to the lender the amount borrowed plus interest over a specified period of time. A typical (plain vanilla) bond issued in the United States specifies A fixed date when the amount borrowed (the principal) is due, called the maturity date. The contractual amount of interest, which typically is paid every six months. Assuming that the issuer does not default or redeem the issue prior to the maturity date, an investor holding this bond until the maturity date is assured of a known cash flow pattern. SECTORS OF THE U.S. BOND MARKET The U.S. bond market is divided into six sectors U.S. Treasury sector, agency sector, municipal sector, corporate sector, asset-backed securities, and mortgage sector. The Treasury Sector The Treasury sector includes securities issued by the U.S. government. These securities include Treasury bills, notes, and bonds. This sector plays a key role in the valuation of securities and the determination of interest rates throughout the world. The Agency Sector The agency sector includes securities issued by federally related institutions and government-sponsored enterprises. The securities issued are not backed by any collateral and are referred to as agency debenture securities. The Municipal Sector The municipal sector is where state and local governments and their authorities raise funds. Bonds issued in this sector typically are exempt from federal income taxes. The Corporate Sector The corporate sector includes (i) securities issued by U.S. corporations and (ii) securities issued in the United States by foreign corporations. Issuers in the corporate sector issue bonds, medium-term notes, structured notes, and commercial paper. The corporate sector is divided into the investment grade and noninvestment grade…

    • 2079 Words
    • 5 Pages
    Powerful Essays
  • Good Essays

    date (November 5, 2008). Be sure to take into account the 2% haircut on the repo.…

    • 1328 Words
    • 6 Pages
    Good Essays
  • Good Essays

    Dixon Case

    • 1644 Words
    • 7 Pages

    The risk-free rate used was the long-term Treasury bond rate of 9.5% while the debt rate premium was calculated by subtracting the long-term Treasury bond rate from the long-term “AA” corporate bond rate. With Dixon’s ability to cover interest expense and relatively low target debt ratio, we applied “AA” rating to Dixon, which yielded the debt premium of 0.75%.…

    • 1644 Words
    • 7 Pages
    Good Essays
  • Good Essays

    Brian Beutler, “GOP’s absurd final whimper: It’s all over but the crying” 2013 Salon Media Group. Inc. Salon, 1 November, 2013. Web. 16 October, 2013…

    • 751 Words
    • 4 Pages
    Good Essays
  • Best Essays

    Brazil Risk Analysis

    • 2991 Words
    • 12 Pages

    Political Risk- Brazil has been a stable democracy for 25 years. Despite some unique risk as corruption, Brazil has been rating overall medium risk for dynamic risks, governance framework, political violence and business and macroeconomic environment.…

    • 2991 Words
    • 12 Pages
    Best Essays
  • Powerful Essays

    What started as an American ‘prime-mortgage’ lending crisis spread to Europe and the emerging markets of Asia, South East Asia and Latin America, affecting a wide range of financial and economic activities and institutions, which includes, the tightening of credit with financial institutions making both corporate and consumer credit harder to get, devaluation of the assets underpinning insurance contracts and pension funds leading to concerns about the ability of the instruments to meet future obligation, devaluation of some currencies /increased currency volatility and liquidity problems in equity funds and hedge funds.(Francis Ikome 2008 - The Social and Economic Consequences of the Global…

    • 1730 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    B lo o m b e r g M a r k e t s February 2003…

    • 1040 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Final global business plan

    • 6910 Words
    • 28 Pages

    One - Very Low Risk, two - Low Risk, three - Moderate Risk, four - High Risk, and five -Very High Risk. The country leads the region with are risk score of one is Singapore followed by Indonesia two, Malaysia and Thailand three, Philippines and Viet Nam 4. The Philippines and Viet Nam have significant political risks that need to be taken into consideration (A.M. Best, 2010).…

    • 6910 Words
    • 28 Pages
    Powerful Essays
  • Good Essays

    Last but not least, the most risky element is the various change of foreign exchange rate. As far as I am concerned, the foreign exchange market is by far the largest and most liquid market in the world. It is a 24-hour market which means that exchange rates and market conditions can change at any time in response to developments that can take place at any time. Any changes in the target country’s currency or in the home country’s currency may influence the yields of the purchasers. For example, U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. This disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's currency.…

    • 508 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Government Bond Market

    • 1364 Words
    • 6 Pages

    Case Facts: Samantha Thompson, who analyzed and traded government bond for the firm of Mercer and Associates, seems to believe that she has found an arbitrage opportunity in U.S government bond market in 1991. U.S government bond market is the largest, most liquid, and closely watched fixed-income markets in the world and hence finding an arbitrage opportunity there was unlikely.…

    • 1364 Words
    • 6 Pages
    Satisfactory Essays
  • Better Essays

    Bond Market Trends

    • 1148 Words
    • 5 Pages

    Financial markets have been subject to significant changes in recent years due to the credit crisis. Experts believed that risk was being under-priced, which was expressed in the markets by a narrow spread. They believed that once the market corrected this under-pricing and re-priced the risk, it would likely cause a dislocation in financial markets by overshooting its equilibrium. Hence the prices, yields and returns on bonds have been significantly effected by the global financial crisis. Looking at the effects this credit crisis had on the short term money market by evaluating bond performance over the past 10 years can give us significant insight into the extent of this dislocation.…

    • 1148 Words
    • 5 Pages
    Better Essays
  • Satisfactory Essays

    Assignment questions

    • 586 Words
    • 3 Pages

    For the first class, please prepare your answers to the following two questions on this case…

    • 586 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Global Credit Availability

    • 1723 Words
    • 7 Pages

    These terms all mean one thing, as we the public, government, and businesses receive credit, we must be responsible with it and ensure that we repay our obligations.…

    • 1723 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    When comparing the U.S. to other countries with ‘AAA’ long-term ratings, we observe that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., experts estimate that the five sovereigns (Canada, France, Germany, U.K) will have net general government debt to GDP ratios in 2012 ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt at 74%. By 2015, they project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt at 79%. However, in contrast with the U.S., they that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.…

    • 1029 Words
    • 5 Pages
    Powerful Essays