In this paper I develop a model of sovereign lending with default and long-duration coupon bonds. Long-duration bonds offer an insurance benefit to the borrower because countries are not required to frequently roll-over outstanding debt. However, investors anticipate that countries might default in the future and ask for returns that compensate for this risk. In this framework, I find that bonds with longer duration offer higher interest rate spreads. Bonds issued by countries that are more likely to receive negative income shocks when investors’ consumption is low have significantly higher interest rate spreads because investors anticipate defaults many periods into the future

Risk premia in long-duration sovereign bonds / Borri, Nicola. - 1:(2015).

Risk premia in long-duration sovereign bonds

BORRI, NICOLA
2015

Abstract

In this paper I develop a model of sovereign lending with default and long-duration coupon bonds. Long-duration bonds offer an insurance benefit to the borrower because countries are not required to frequently roll-over outstanding debt. However, investors anticipate that countries might default in the future and ask for returns that compensate for this risk. In this framework, I find that bonds with longer duration offer higher interest rate spreads. Bonds issued by countries that are more likely to receive negative income shocks when investors’ consumption is low have significantly higher interest rate spreads because investors anticipate defaults many periods into the future
Default risk; bonds
Risk premia in long-duration sovereign bonds / Borri, Nicola. - 1:(2015).
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/144394
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