Abstract
Corporate bond yields are the manifestation of the cost of financing for private firms, and if properly evaluated, they provide researchers with valuable risk information. Within this context, this work is the first study producing corporate yield spreads for all S&P-rated bonds of G20 nations to explain their comparative riskiness. The option-adjusted spread analysis is an advanced method that enables us to compare the bonds with embedded options and different cash flow characteristics. For securities with embedded options, the volatility in the interest rates plays a role in ascertaining whether the option is going to be invoked or not. Therefore, researchers need a spread that, when added to all the forward rates on the tree, will make the theoretical value equal to the market price. The spread that satisfies this condition is called the option-adjusted spread, since it considers the option embedded into the issue. Ultimately, this work investigates the credit risk differentials of S&P rated outstanding bonds issued by the G20 nations to provide international finance professionals with option-adjusted corporate yield spreads showing the credit risk attributable to debt instruments. Detailed results computed using OAS methodology are presented in tables and used to answer the six vital credit-risk-related questions introduced in the introduction.
Highlights
In today’s world, the bonds markets around the globe are well integrated
This paper, aims to investigate the credit risk differentials of S&P rated outstanding bonds issued by the Group of 20 Nations (G20) countries to provide international finance researchers and practitioners with certain comparison parameters in debt financing
We present the computed option-adjusted yield spreads for all outstanding bonds of the G20 nations rated by Standard and Poor using S&P risk classes matching the terms of Treasuries
Summary
In today’s world, the bonds markets around the globe are well integrated. It is not too difficult to obtain the ratings of foreign bonds, purchase foreign bonds, include them in portfolios, or use them for hedging. This paper, aims to investigate the credit risk differentials of S&P rated outstanding bonds issued by the G20 countries to provide international finance researchers and practitioners with certain comparison parameters in debt financing. This is valuable for at least two important reasons: first, credit risk standing is important in explaining a country’s position in the global financial arena, and second, knowing the credit risk differentials between two countries is a good starting point to assess the country risk that is otherwise hidden inside the credit-risk spread. Elaborating on the cost of financing is valuable at multilevel
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