Country Risk Premium - Question

Q . Yield of U.S.-denominated bond of foreign government is 14 percent. The bond is BB rated. The comparable BB-rated U.S. corporate bond yield is 7 percent. The 10-year U.S. T-bond yields 4 percent. Can someone please answer and as well explain how he/she got the answer ?

Is it just 14 - 7 = 7%?

I think it should be 10% as you would compare risk-free rate against risk-free rate. The foreign BB bond is a government bond, so it should be compared to another government. I would like this to be confirmed though.

Schweser says this BB-rated credit yield spread = 7% – 4% = 3% Country risk premium = (14% – 4%) – 3% = 7% whereas I think that if comparable govt bonds are there then the difference b/w them should be the CRP. Can someone explain ?

> BB-rated credit yield spread = 7% – 4% = 3% This means there is 3% more risk on U.S. corporate bonds than risk-free. > Country risk premium = (14% – 4%) – 3% = 7% So, it seems they are suggesting that country risk for the foreign country is the difference between the two risk-free rates, minus the additonal risk that U.S. corporate bonds have over the risk-free rate. I don’t think U.S. corporate bonds should have anything to do with this.

I’d say 10%, same as Dreary CFAI pg 134 Book 4 “…the country premium is often estimated as the yield on emerging market bonds minus the yield on developed market government bonds” so 14% - 4% = 10%

10%. (I think I did this question before.)