Default Spread

Default Spread

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lender default means (i) the refusal or failure of any lender to make available its portion of any incurrence of loans or participations in letters of credit or swingline loans, which refusal or failure is not cured within two (2) business days after the date of such refusal or failure; (ii) the failure of any lender to pay over to the …
Jan 5, 2022 In the short term especially, the equity country risk premium is likely to be greater than the country's default spread . You can estimate an adjusted country risk premium by multiplying the default spread by the relative equity market volatility for that market (Std dev in country equity market/Std dev in country bond).
May 24, 2021 The spread between the yields of BBB-ranked and AA-ranked corporate bonds, commonly known as the default spread , tracks the equity risk premium and reflects aggregate default probability.
• CDS spread = 1.52%! • Bond rating (Baa3) spread = 2.00%! Country Risk premium! • Default spread * (Equity volatility/ Bond volatility)! = 2.00% (19.207/14.531) = 2.64%! Aswath Damodaran! 11! Country Risk Premiums! January 2011! Angola! 11.00%! Botswana! 6.50%! Egypt! 8.60% ! Mauritius! 7.63%! Morocco! 8.60%! South Africa! 6.73%!
This default spread is illustrated in Table 2: Damodaran (2012) then adds this default spread to a local market risk premium of 5.5 per cent for each country multiplied by an equity-to-bond market...
Mar 10, 2022 It is the spread that results from zero-coupon treasury yield curves which are needed for discounting pre-determined cash flow schedule to reach its current market price. This kind of spread is...
Mar 14, 2022 Credit spreads are also referred to as "bond spreads " or " default spreads ." Credit spread allows a comparison between a corporate bond and a risk-free alternative. A credit spread can also refer to...
Jan 25, 2022 The current spread is 3% (5% - 2%). With credit spreads historically averaging 2%, this may provide an indication that the U.S. economy is showing signs of economic weakness. Additional Resources Thank you for reading CFI's guide on Credit Spread . To keep learning and advancing your career, the following CFI resources will be helpful:
Jun 23, 2022 Global corporate default rate rose in May 16 Jun 2022 | Moody's Investors Service Nine Moody's-rated corporate debt issuers defaulted in May, up from five in April. We project that the trailing 12-month global speculative-grade corporate default rate will rise to 3.3% in a year's time, up from 2.1% in May. Sector In-Depth
2 days ago In the case of Government Bonds, the yield spread also means credit spread . These countries usually differ regarding credit quality. A positive spread means that the percentage yearly return of a bond over another is higher. For example, if one bond is yielding 5% and another is yielding 3%, the spread is 2%, or 200 basis points (bp). Last ...
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Estimated default spreads by credit rating
Capital as an instrument for financial regulation has come under scrutiny since the financial crisis of 2007 to 2010 highlighted some deficiencies in the ability of capital to absorb unexpected losses and the procyclical nature of capital. This scrutiny arises mainly from the perspective that one of the principal objectives of
capital requirements...
... this information, local currency credit ratings were used to obtain a default spread in bps above the US Treasury bond rate using historical credit data of US corporates and country bonds. This default spread is illustrated in Table 2 : Damodaran (2012) then adds this default spread to a local market risk premium of 5.5 per cent for each country multiplied by an equity-to-bond market volatility factor of 1.5. This represents the total equity market premium for that country. ...
... of assuming a flat 5.5 per cent local market risk premium for all countries, data were obtained from a survey conducted by Fernández, Aguirreamalloa and Corres (2011), which obtained the market risk premia used by different stakeholders across 56 countries. From this, the average market risk premia for the countries used in this article are indicated in Table 3. Bps default spreads were also used in this article ( Table 2 ), but each country's credit rating as measured by Fitch was obtained so that the default spread used for each country was as shown in Table 4. ...
In the ultra-low interest rate environment after the financial crisis, it has been often pointed out that the “search for yield” behavior of financial institutions might have been intensifying interest rate decreases. One hypothesis to explain search for yield is that banks try to buy longer-term bonds even when they recognize negative term premium...
This paper analyses the determinants of net interest margin during the period 2008–2014 in the Euro Area. The starting point of the analysis is the premise that this variable is a gauge of financial institutions’ health and stability. In particular, since the outbreak of the global financial crisis, difficulties in achieving sustainable levels of p...
Gringotts Wizarding Bank is well known as the only financial institution in all of the Wizarding UK as documented in the works recounting the heroics of Harry Potter. The concentration of power and wealth in this single bank needs to be weighed against the financial stability of the entire Wizarding economy. This study will consider the impact to f...
In order to address the weaknesses of the financial system revealed by the recent financial crisis, Basel Committee introduced a series of changes in the international regulatory framework. Basel III is a set of proposed modifications to international rules on capital adequacy and liquidity of banks as well as any other issues relating to banking s...
With the growing size of the interbank financial market, it is often argued that capital regulations for large wholesale banks should be more stringent than for small retail banks. This study constructs a general equilibrium model incorporating both wholesale and retail banks under capital regulation to discuss whether wholesale banks should face t...
... This article aims to build on previous work done by Jacobs and Van Vuuren (2013) by further investigating capital requirements as a regulatory tool and assessing whether these requirements can achieve their objective of providing level playing fields (specifically with regard to the cost of capital) between countries. Financial regulations as a whole (specifically the Basel Accords (Basel) and Solvency II) are used as the basis for the inquiry. ...
... The methodology, data, and assumptions employed in this article are described in section 4 while the results and findings are presented in section 5. Section 6 concludes. Jacobs and Van Vuuren (2013) showed that the COC differs between various countries and that it increases considerably between developing countries compared with developed economies as more country-specific factors are factored into the calculation. As a result, international capital requirements, which are generic assume that the COC between countries is equal which serves as the basis for financial regulation, not providing for an equitable competitive footing for all. ...
... Source: Jacobs and Van Vuuren (2013) Figure 1 shows the COC of groups of developed and developing countries based on three different calculation methods for obtaining the WACC, with each group using more country-specific factors as inputs. For developing countries, the results indicate that the comparative COC between developed and developing countries increases at an increasing rate as more country-specific factors are considered. ...
Capital as a regulatory instrument has been shown to contribute to competitiveness distortions between developed and developing countries. There is a dearth of literature that analyses the possibility of further competitiveness discrepancies to which capital requirements may contribute among developing countries. This article explores whether regulatory capital requirements lead to unequal competitive conditions between developing countries based on their costs of capital. It also attempts to identify drivers of such discrepancies. Data of 52 financial institutions from 20 countries spread across 4 geographical regions are used for the analysis.
Purpose

This paper aims to examine the relationship between commercial bank lending and business cycle in South Africa. This paper attempts to know whether commercial bank lending in South Africa is procyclical.

Design/methodology/approach

The model assumed that the lending behaviour is related to the business cycle. In this study, vector error correction model (VECM) is used to capture the relationship between bank lending and business cycle to accurately elicit the macroeconomic long-run relationship between business cycle and bank lending, as some banks might slow down bank lending due to some idiosyncratic factors that are not related to the downturn in the economy. This paper uses data from South African Reserve Bank for the period of 1990-2015 using VECM to understand the extent to which business cycle fluctuation can affect credit crunch in the financial system. The Johansen cointegration approach is used to ascertain whether there is indeed a long-run co-movement between credit growth and business cycle.

Findings

Results from the VECM show that there are significant linkages among the variables, especially between credit to gross domestic product (GDP) and business cycle. The influence of business cycle is seen vividly after a period of four to five years, where business cycle explains 20 per cent of the variation in the credit to GDP. South African banks tend to change their lending behaviour during upturns and downturns. This result further confirms the assertion in theory that credit follows business cycle and can amplify credit crunch. The result shows that in the long run, fluctuations in the business cycle can influence the credit growth in South Africa.

Research limitations/implications

The impulse analysis result shows that the impact of business cycle shock is very persistent and lasting. This also demonstrates that the shocks to the business cycle result have a persistent and long-lasting impact on credit. This study finds that commercial bank lending in South Africa is procyclical. It is suggested that the South African economy needs forward-looking policies that will mitigate the flow of credit to the real sector and at the same time ensure financial stability.

Originality/value

Most research papers rarely distinguish between the demand side and supply side of credit procyclicality. This report is presented to develop an econometric model that will examine demand side procyclicality. This study adopts more realistic and novel methods that will help in explaining the relationship between bank lending and business cycle in South Africa, especially after the global financial crisis. This report is presented with a concise and detailed analysis and interpretation.
Regulatory capital – as a tool for financial regulation – has come under scrutiny following the financial crisis of 2007-2010 in terms of its ability to achieve the major objectives of financial regulations, namely contributing to financial stability; the provision of equally competitive regulatory conditions for financial institutions; and aiming to ensure that regulatory capital requirements are risk-sensitive. This article investigates and compares the risk-sensitivity of economic capital and regulatory capital requirements empirically from a systemic and institution-specific perspective. The results are assessed to determine whether current regulatory capital requirements are representative of the relevant risks financial institutions face. Given these results as well as calls to strengthen Basel's Pillar 2 disciplines in the aftermath of the crisis, it also presents a case for regulators to place a heavier reliance on economic capital – rather than regulatory capital numbers.
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In finance, a spread refers to the difference between two prices, rates, or yields One of the most common types is the bid-ask spread, which refers to the gap between the bid (from buyers) and the ask (from sellers) prices of a security or asset Spread can also refer to the difference in a trading position – the gap between a short position (that is, selling) in one futures contract or currency and a long position (that is, buying) in another

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The middle rate, also called mid and mid-market rate, is the exchange rate between a currency's bid and ask rates in the foreign exchange market.

Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.

A two-way quote indicates the current bid price and current ask price of a security; it is more informative than the usual last-trade quote.

A futures spread is an arbitrage technique in which a trader takes two positions on a commodity to capitalize on a discrepancy in price.

Quotation is a common term that refers to the highest bid price for a security or commodity and the lowest ask price available for the same asset.

A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market.

Credit Spread vs. Debit Spread: What's the Difference?

After-Hours Trading: Bid and Ask Quote Disparity

Option-Adjusted vs. Zero-Volatility Spread: What's the Difference?

Understanding the Numbers After Bid/Ask Prices

A Breakdown on How the Stock Market Works

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A spread can have several meanings in finance. Generally, the spread refers to the difference between two prices, rates, or yields . In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond , or commodity. This is known as a bid-ask spread.

Spread can also refer to the difference in a trading position – the gap between a short position (that is, selling) in one futures contract or currency and a long position (that is, buying) in another. This is officially known as a spread trade.

In underwriting , the spread can mean the difference between the amount paid to the issuer of a security and the price paid by the investor for that security—that is, the cost an underwriter pays to buy an issue, compared to the price at which the underwriter sells it to the public.

In lending, the spread can also refer to the price a borrower pays above a benchmark yield to get a loan. If the prime interest rate is 3%, for example, and a borrower gets a mortgage charging a 5% rate, the spread is 2%.

The bid-ask spread is also known as the bid-offer spread and buy-sell. This sort of asset spread is influenced by a number of factors:

For securities like futures contracts , options, currency pairs, and stocks, the bid-offer spread is the difference between the prices given for an immediate order—the ask—and an immediate sale – the bid. For a stock option , the spread would be the difference between the strike price and the market value .

One of the uses of the bid-ask spread is to measure the liquidity of the market and the size of the transaction cost of the stock. For example, on Jan. 11, 2022, the bid price for Alphabet Inc., Google's parent company, was $2,790.86 and the ask price was $2,795.47. 1 The spread is $4.61. This indicates that Alphabet is a highly liquid stock, with considerable trading volume.

The spread trade is also called the relative value trade. Spread trades are the act of purchasing one security and selling another related security as a unit. Usually, spread trades are done with options or futures contracts. These trades are executed to produce an overall net trade with a positive value called the spread.

Spreads are priced as a unit or as pairs in future exchanges to ensure the simultaneous buying and selling of a security. Doing so eliminates execution risk wherein one part of the pair executes but another part fails.

The yield spread is also called the credit spread . The yield spread shows the difference between the quoted rates of return between two different investment vehicles. These vehicles usually differ regarding credit quality .

Some analysts refer to the yield spread as the “yield spread of X over Y.” This is usually the yearly percentage return on investment of one financial instrument minus the annual percentage return on investment of another.

To discount a security’s price and match it to the current market price, the yield spread must be added to a benchmark yield curve . This adjusted price is called an option-adjusted spread . This is usually used for mortgage-backed securities (MBS), bonds, interest rate derivatives, and options. For securities with cash flows that are separate from future interest rate movements, the option-adjusted spread becomes the same as the Z-spread.

The Z-spread is also called the yield curve spread and zero-volatility spread . The Z-spread is used for mortgage-backed securities. It is the spread that results from zero-coupon treasury yield curves which are needed for discounting pre-determined cash
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Default Spread

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