Currency

In: Business and Management

Submitted By naweedp
Words 324
Pages 2
Credit Risk with regards to International Bond Portfolio Management (IBPM)
Credit risk essentially pertains to a bond holder in a case where the holder obtains a risk of not receiving coupon or principal payments. There are many types of counterparties, from individuals to sovereign governments and a variation of obligations in the form of corporate bond holdings, non- sovereign, or sovereign debts, from auto loans to derivative transactions and is correlated on an international scale. Market discriminations of decreasing credit risk value or an increase in market risk abhorrence can inevitably lead to a decrease in in a bond’s price (Przybylinski, 2012: pg.6). Volatility of the portfolio is then effectively increased and therefore a decrease in returns.
Investors often use credit ratings provided by rating agencies, which have been highly criticized ever since the 2008 US Financial crisis (Ryan,2012:3), such as Standard & Poor’s, Moody and Fitch in order to measure credit risks of viable bonds. These ratings mostly apply to corporate bonds as the demand for sovereign bonds are not as prevalent which is also contributed to the fact that sovereign bonds are not easy to compare as non-sovereign bonds.
Table 1 below clearly indicates the ratings of sovereign bonds of various countries with ratings of May 2010. As one can see, the European sovereign bonds have a dissimilar rating as oppose to the markets, especially since Europe is experiencing a financial crisis. European sovereigns appear cheap according to table 1 due to agencies not taking into consideration actual fiscal issues which implies that European economies are rated higher to that of actual market spreads which indicate rating agencies’ criticisms.

Table 2 below shows how sovereign bond investors may face contests as below investment quality bonds are becoming more risky as…...

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