If the rationale for defaulting is avoiding inflation and negative risk-free rates occur when a currency is deflationary, then why does Japan have a default spread at all?
rationale for defaulting is not only to avoid inflation but also to devalue a currency, so a government can still choose to default to reduce their value even though defaulting is an extreme method to devalue ur currency but the default risk remains nonetheless. Now coming to Japan, so u might know that japan inflation reached a 40 year high sometime last year and this has increased the currency value and Japan's government policy is structured to make japanese yen the currency with least value. So now basically what happens when a government defaults is their currency value reduces and when a government doesn't default, then their currency value increases as inflation increases. So now due to Japan's policy, the government might be like, oh no inflation is going up higher and hence our currency value also than our policy, so lets default and devalue our currency to our policy level. So there might still be default risk for a currency depending on the government policies. So, basically what default spread measures, the orange part, is the possibility that the present government thats in control of the currency might default
At the time you commented, Japanese risk free rate was 0.47%, real risk free rate was -3.669% and inflation was 4.30%. Inflation + real risk free rate = Risk free rate The entire default spread (which is the difference between the yield on a corporate bond and the yield on a risk-free government bond of the same maturity) is the equity risk premium.
Studied this today for CFA L2 cost of cap under corp issuers
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If the rationale for defaulting is avoiding inflation and negative risk-free rates occur when a currency is deflationary, then why does Japan have a default spread at all?
rationale for defaulting is not only to avoid inflation but also to devalue a currency, so a government can still choose to default to reduce their value even though defaulting is an extreme method to devalue ur currency but the default risk remains nonetheless. Now coming to Japan, so u might know that japan inflation reached a 40 year high sometime last year and this has increased the currency value and Japan's government policy is structured to make japanese yen the currency with least value. So now basically what happens when a government defaults is their currency value reduces and when a government doesn't default, then their currency value increases as inflation increases. So now due to Japan's policy, the government might be like, oh no inflation is going up higher and hence our currency value also than our policy, so lets default and devalue our currency to our policy level. So there might still be default risk for a currency depending on the government policies.
So, basically what default spread measures, the orange part, is the possibility that the present government thats in control of the currency might default
@@kumarapillay3122 Thats an abysmal way to answer that. Value of the currency does not increase with inflation. Stupid comment.
@@mertozel8677 whats the correct answer then?...i would want to know the correct answer, so not to repeat this mistake
At the time you commented, Japanese risk free rate was 0.47%, real risk free rate was -3.669% and inflation was 4.30%.
Inflation + real risk free rate = Risk free rate
The entire default spread (which is the difference between the yield on a corporate bond and the yield on a risk-free government bond of the same maturity) is the equity risk premium.
Aswath Damodaran: "I guarantee, there will be no $3B [trading] losses if your mom is looking over your shoulder."
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@aswathd. hi, does this scamming work??
I think he talks too much than going straight to the point. It looks boring to me