When using a non-US sovereign borrowing rate as risk-free rate, one needs to be careful. It...

 

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When using a non-US sovereign borrowing rate as risk-free rate, one needs to be careful. It is possible that it is not risk-free (check the country credit rating) and the rate contains a default spread. To purge this default spread from the rate and make it truly risk-free, one has a few tools that help measure the spread. They are described in the lecture notes. One approach is to figure out the difference in yields between a bond issued by a risky issuer in 'default-free' currency and a bond issued by a 'default-free' issuer in that same currency (same maturity). The second approach is to use CDS yields and the last one default spreads for a particular country rating provided by Moodys. If the yield on a 10-year Russian government bond is 6.250%. Russia is currently rated by Moodys as Baa3 with the default spread for that rating of 1.950%. What is the risk-free rate in Russian roubles? When using a non-US sovereign borrowing rate as risk-free rate, one needs to be careful. It is possible that it is not risk-free (check the country credit rating) and the rate contains a default spread. To purge this default spread from the rate and make it truly risk-free, one has a few tools that help measure the spread. They are described in the lecture notes. One approach is to figure out the difference in yields between a bond issued by a risky issuer in 'default-free' currency and a bond issued by a 'default-free' issuer in that same currency (same maturity). The second approach is to use CDS yields and the last one default spreads for a particular country rating provided by Moodys. If the yield on a 10-year Russian government bond is 6.250%. Russia is currently rated by Moodys as Baa3 with the default spread for that rating of 1.950%. What is the risk-free rate in Russian roubles?

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