Download - Credit rating process of sovereign bonds
FIXED INCOME SECURITIESCredit rating process of
sovereign bonds with respect to Indian sovereign bonds
Submitted to Prof . Lakhani
Team
Lalit(96) Unnikrishnan (98)
Pooja (94) Rekha(104) Rachana(103)
Sovereign bond
Also knows as government bonds.
One of the oldest investment asset class in the world
Issued by the government.
Denominated in local or foreign currency.
Sovereign bond
s yield
Creditworthiness
Country Risk
Exchange Rate
Three major determinants
Extremely safe
High credit ratings
Lower yields
More risky
Lower credit ratings
Higher yields
Why to invest in sovereign
bond
safest investments
produce impressive
returnsissued by national
governments
Risk from sovereign bonds Government’s willingness to pay
Countries with 1. Weak economy 2. High debt burden 3. Weak or volatile currency 4. Little ability to collect taxes finds difficult to pay back its debt
Credit risk Currency risk Inflation risk
Ways to
protect
against
sovereign risk
Credit rating • Evaluation of the credit worthiness of a debtor
Sovereign credit rating
• credit rating of a sovereign entity, i.e. a national government
S&P
Moody’s
The players and the game
What Is a Sovereign Debt Crisis? WithExamples
• Greek ( Debt to GDP ratio reached to 175 %)• Iceland (Bankruptcy, took $62 billion debt
while GDP was only $14 billion)• Eurozone ( Took the advantage of lower
interest rates)1. Ireland2. Italy3. Portugal
S&p (BBB-)
Moody’s
( Baa3)
Fitch's(BBB-)
India’s credit rating
Determinants of Sovereign
ratings
• .
Effects of sovereign
ratings
Inflation Risk
Political Instability
Fewer Options
Indian economy forecast2015 2020 IN
Currency 64.81 58.43 -Stock market 26904.11 29700 Index pointsGovernment bond 10y 7.55 8.31 percentGDP 2066.90 2486 USD BillionGDP per capita 1262.64 2374 USDExport prices 21266.31 38179 USD MillionImport Prices 33744.28 49600 USD MillionInterest rates 6.75 4.5 percentGovernment spending 3100.18 2855 INR BillionCorporate tax rate 34.61 30 PercentGovernment revenues 3455.36 3868 INR BillionGovernment debt to GDP 65.50 64.09 PercentFDI 1943.00 3836 USD MillionCorruption rank 85.00 74 -