@@ramyasri6093 don't give up, I can't even understood English last year and now slowly I understand what he is teaching. It take time but you can make it
I'm learning so much about valuation from Pr Damodaran. I just love his intellectual honesty, facing valuation issues and limitations with a rational approach and pointing out the unrational dimension of it all.
Thank you very much. I used to think that the free risk rate was related to the place where the business is based, not to the currency of the valuation. This is a new approach for me.
see who pays to get the valuation done(previous video somewhere), does Moodys and other rating agencies get paid by governments to rate government bonds like in the case of corporate bonds where corporate pay to get it rated
I do not understand why do not take the USA 10YTY and add the country risk premium of the company’s country you’re trying to valuate. In a global world, a Rwanda investor can buy a 10YTY bond in USA.
Hi Sir, with regards to the risk free rate. As there are multiple government bonds in circulation with various YTM, should we pit a bonds' interest rate with similar YTM to our investment horizon (I.e 5 Year YTM Bond interest rate to a 5 year investment horizon)?
great video, i have a question. said country government bond rate - CDS = risk-free rate of the said country in nominal rates. but when i use step 1, the CDS calculated was way off from the moody's credit rating. am i doing something wrong here?
I couldn't keep up with the final scenario if your country has no rating, CDS spread or a dollar denominated bond. So after finding a rated country with the same risk score, how do I arrived to a default spread? would you mind elaborating on that?
2:19 "once you pick the currency in which you are going to estimate the cashflows, your discount rate has to be exactly in the same currency". One question for us third world folks; What if the project's initial outlay is in USD and the projects subsequent cash inflows are in the local currency (a common occurrence in third world economics is that the initial project equipment/expertise are imported from first world countries and the subsequent cashflows are generated from the local economy in the local currency. In this case, which currency do I use to evaluated the project and the subsequent rate?
if risk free rate is 4.8% and expected inflation is 3.2% if the expectation inflation change that expected inlation rises 4.5% what will new risk free rate be
so if i am an european investor who has euros and wants to invest in a us company at a us stock exchange, say microsoft or apple, what should be my risk free rate then?
I just looked up my country goverment bond 10y and the number is negative? Also saw that Germany is -0.51. That doesn't make sense. As a bond holder I will lose money. Should I use this negative number as a risk free rate then?
I am quite in awe of what you allude to but am struggling to come to terms with all the factors that determine valuation. How do I overcome this challenge?
Me too... I hate being spoken at with endlessly. Also, I am starting to think we are not going to see a structured valuation since all we get are fairly Microsoft Paint equivalent graphs and zero spreadsheets/data.
What if the Bonds are not dollar-denominated? Even in this situation can I deduct the default spread? Example: Indias 2030GS Rate is 6.14%, According to the Damodaran website the spread is 1.95% so can I take risk-free rate as 6.14-1.95???
In the case where you have to use the rating assigned by the rating agencies to obtain the default spread, wouldn't you have to adjust that spread corresponding to inflation of the country that you're applying it to ?
8:54 why long term bond rate? regarding the dcf-model doesn't it have to be the government bond rate depending on the year of the estimated cash flow, in other words for cf1doesnt the risk free rate have to be that of a 1y-government bond, cf2 risk free rate of a 2y-government bond,...cfn ny-government bond?
I have read that the real Discount rate is Inflation Adjusted, hence 7 and a quarter is not Nominal Discount rate but Real Discount rate. Please clear the doubt
Point of correction professor, All government debt are risk-free unless they issue that debt in other countries currency. At that point it seize to become a risk-free since it has no control over the printing press of that currency. That was what happened to Argentina. Instead of issuing debt in their own currency, they choose to issue debt in U.S dollars which is one of the most stupid thing any government can do. But unfortunately developing and emerging countries continue on this unintelligent path when issuing debt.
Great lesson sir! Wanted to check - yes there is nowadays a non-0 probability of the US defaulting. So in this case we take the UST 10yr rate and subtract an estimate of risk / spread. But this would only reduce the Risk free rate, and hence the discount rate, which in effect would give rise to a larger number on valuation? So the riskier it gets, the more the value? Clearly I'm missing something here.... +Aswath Damodaran
To the best of what I understood : Riskier the discount rates, more valuables the other assets become. For example, when UST gets riskier, ofcourse the UST rates should fall - but that makes other assets more attractive (compared to the so-called risk free asset like US T-Bonds).
The risk free rate is only one input in determining the Cost of Equity and/or the discount rate to be used in the PV calculation. The professor is just explaining how to determine this input for a risk free rate under different scenarios of sovereign riskiness. Please see the episode 3 PDF for further information at this URL: people.stern.nyu.edu/adamodar/pdfiles/valonlineslides/
can someone explain why we substract the BZ default swap rate of 1.7% from the 10-yr BZ gov bond of 9% to get the risk free rate. I thought we add it, so we get the risk free rate charged by international investor to account for currency risk?
If you are brazilian, or want to do valuation of brazilian companies, here is the link to the CDS for Brazil: www.worldgovernmentbonds.com/cds-historical-data/brazil/5-years/ now, september 2020, according to CDS the risk of default is about 3,23%. As american bonds are for all that matter 0%, since Brazil have a dollar bond with a rate of 3% I should say that this works like a sharm!
Dear Sir, if we prepare projected cash flow for a period of 5 years and then determine valuation accordingly in such instance can i consider risk free rate based on 5 year government bonds or do i need to consider 10 year government bonds. Kindly advice.
He did mention, that even if our time period is over, the cash flows tends to continue or something like that so he did say to choose the furthest away bond rate( 30 year) however with 30 year bond rate it is difficult to get the appropriate default rates hence he sticks to 10 year bond rate. Not sure if i answered it right but this is based off of my understanding. Also it's been 6years since you asked this question i don't even think it matters to you anymore🤣.
what's the market portfolio? does it depend on the currency or is it a world portfolio like the msci world index? if it depends on the currency take a look at the us market e.g.. why is often used the s&p 500 as the market portfolio and not the s&p 1200 as it is much more diversified compared to the s&p 500? this all makes no sense to me.
Sankalp Singh yes there is. The name is "Investment Valuation" by Aswath Damodaran. The subject is the same as the lectures, but he goes into a lot more detail.
how to you find a rf for a country that has no 10 year T-bond, and that has only issued 1 year bonds 3 years ago and none since? (I am talking about Saudi Arabia)
I would suggest you to find the USD equivalent discount rate by adding the default spread using the country ratings and then converting it to Saudi riyal terms by scaling it on inflation parameters for both countries. This would give you the rate in Riyal terms with default risk. Now to make it risk free you should probably scale the default spread ascertained through country rating by scaling it on inflation parameters and then subtracting it from the above riyal discount rate to finally get a Risk-free Riyal rate. Makes sense ?
Can anybody explain me why an increase in risk free rate would logically lead to an increased CAPM and therefore to a decreased asset value, as CAPM is the denominator when we discount cash flows in a equity based model? Isnt a high risk free rate better than a lower one? Is this any related to the fact that if risk free rates spike, then nobody would invest money in stocks causing assets demand to decline and consequently their prices to fall?
A higher risk free rate would mean that you're discounting the future "Certainty Equivalent Cash Flows"(as seen in the last video in this playlist) with a bigger denoinator (Rf), thus resulting in a decreased valuation. In CAPM 5:44, the second Rf tterm is bieng multiplied by Beta. if the Beta was = 1, the change in Rf would'nt do any thing as both Rf term would cancel eachother out. But if the Beta is >1 (which it mostly is), an increase in Rf would decrease the Expected Return as now the negative term of Rf, as can be seen in the right end of the formula, would be greater than the standalone positve term of Rf. And if Beta is
@@PeyushSaini96 CAPM= Rf +b×(Ri-Rf) CAPM1= 2.5% + 2×(6%-2.5%)= 9.5% CAPM2= 3.5% +. 2×(6%-3.5%)= 8.5% So here, an increase in Rf causes a decreased CAPM, meaning a smaller denominator and so an increased asset value, right?
The real risk free rate has been negative for a decade. Around 2012, I was looking for academic research on the implications of negative rates. Academics are usually about ten years behind reality. I don't how he can teach these concepts with a straight face. The markets are so manipulated these days. The whole paradigm of finance collapses with a negative real-risk free rate.
The answer to your question really depends on your objective: are you a retail investor trying to protect your hard earned money? Or are you a salaried finance professional (professor, institutional investor, bank employee) who wants to further their career?! Because the answers are very different 😅
@@giacomocampagnola5348 Very hard times for investors with small amounts (under 1 million euro). As much as possible I would try to stay out of the financial system (avoid playing in the markets) and invest in physical assets which generate a cash flow. But that is very difficult. If you're in Italy, I thought this was a good offer. I wonder if they will do another one. www.ilsole24ore.com/art/cdp-tutto-esaurito-bond-retail-l-offerta-alzata-15-miliardi-ACeXdDR?refresh_ce=1
Can anyone explain me why is Greece's short term treasury bond yield are higher compared to the long term bond yield? Its shown in the chart of EU's Rf's.
Golam, please assume a simplified case when both bonds (with the maturities of 2 and 10 years) are discount bonds (they pay no coupons). Now assume that the 2-y bond yield is 20% and the 10-y bond yield is 15%. It means that the prices of the 2-y and 10-y bonds are 64% and 19.7% of the nominal (face) value now, respectively. To simplify more, let's assume the recovery rate of both bonds is 0% (if Greece defaults on its sovereign debt, you get nothing at all). Suppose the market assumes the default rate (risk) for Greece (the probability it defaults) is 18% during the first year, and, if it doesn't default during the next year, the probability it defaults during the second year is also 18%. It means that the expected payoff in 2 years (if you buy the 2-y discount bond) is 67.24% of its face value. We recall that it is trading at 64% at the moment. It means the investors are ready to get 67.24/64=1.051 (5.1% for 2 years investment) = 1.025 (exactly 2.5% annual compound return). This 2.5% will be the 2-y EUR risk-free rate. Now suppose the market assumes the default rate (risk) for Greece in each year after the second (if it survives the first most difficult two years) is 10% each time if the government hasn't defaulted during the previous year. The expected return in 10 years will be 0.82*0.82*0.9*0.9*0.9*0.9*0.9*0.9*0.9*0.9= 28.9% of the face value, which is 28.9/19.7 times higher than the current price, which is 47% premium, or 3.9% annual compound return. What is going to happen with the market price of both bonds if Greece doesn't default by the end of year 2 in 2 years. The price of 2-y bond will climb from 64% up to 100% of its face value. If one asks what the price of the 10-y bond will be in 2 years, in its estimate one thing is certain: the remaining 8 years' risk-free discount rate (if nothing changes) will be in the range of 2.5-3.9%. Because 8 years is longer than 2 and shorter than 10. So the expected price will be in the range of (0.9^8)/(1.025^8) and (0.9^8)/(1.039^8) or 26.7-34.0% of its face value. Therefore if Greece doesn't default, the 10-y bond price will rise from 19.7% to 26.7-34.0% by the end of year 2. It will give a higher than 20% return, but this is only because the risk-free portion was definitely higher than 2.5% due to the more delayed maturity.
Hello, I thought real cash flows means adjusted for inflation while nominal cash flows don't consider expected inflation? For example, real GDP adjusts for inflation. But why is it the opposite for cash flows?
*Doubt regarding CDS spread* Dear sir my questions are- 1. From where can I get cds spread for sovereign? I have given my a lot time on google and also tried to find it on bloomberg but couldn't find anything, please help. 2. How did you start with rating-based default spread? I noticed in your excel file that you just changed previous year default spread by average change in cds % change. I want to know how did you get default spread for the very 1st time? Is it just taking cds spread and see the rating against available sovereign and estimate for left or something else. Please help.
The background was helpful but the actual instructions are unclear: - For US take 10yr bond rate ("but have to think about its default risk') - For Euro take German bond rate - For EM take bond yield "and subtract default spread"?! - or for EM take bond yield "and add CDS yield"?! Sounds contradictory
ive watched the previous 2 videos on valuation and at this point i just had to pause and point out "sir you are a genius".
Keep it simple.. Thats what i felt abt him... 😇
Good info but Difficult to understand for those with non finance backgrounds
@@ramyasri6093 don't give up, I can't even understood English last year and now slowly I understand what he is teaching. It take time but you can make it
@@ahmadnadir6951 thanks for encouragement.. Will do my best to learn & understand
I second that (again); your work is amazing and your efforts are greatly appreciated.
Thank you for your time and effort sharing your excellent tutorials.
Very insightful and informative series to comprehend fundamentals of Valuation. Thank you Damodaran!
Best current Finance teacher on earth. Great work, explained in a clear and precise way.
Thank You for sharing the knowledge and making it freely accessible.
Very great orator and you explained all vanilla simple. You are a genius
I'm learning so much about valuation from Pr Damodaran. I just love his intellectual honesty, facing valuation issues and limitations with a rational approach and pointing out the unrational dimension of it all.
I'm currently preparing my corporate finance exam studying on your book, I'm so glad to find your lessons here! Very useful, I really appreciate.
Can you name the book?
@@suvinapaul i think it is investment valuation
Best content for valuation 💯 so simplied and look so natural. Truly valuation guru
simple, clear, and correct financial knowledge.
You have added to my knowledge and understanding of finance .
Great Teacher .. Great Lecture ..
thank you for sharing your knowledge!
Thanks Prof. AD. Much appreciated!
Wow! Thank you for this! You are an amazing teacher. I might actually be able to pass the level 1 CFA with the help of your videos.
I can't say that wasn't beautiful. with a lot of love, I can say that was a brilliant approach to explain it.
Bravo! Thank you very much. That makes it so much clear.
Great and important lesson
This is called first principles teaching . Thanks boas for this.
Very grateful for all the videos
i'm glad to see Brazil, its help a lot.
you are a great man sir
Thank you very much. I used to think that the free risk rate was related to the place where the business is based, not to the currency of the valuation. This is a new approach for me.
same, he explains it so well
You're a gem.
Thank you so much!
see who pays to get the valuation done(previous video somewhere), does Moodys and other rating agencies get paid by governments to rate government bonds like in the case of corporate bonds where corporate pay to get it rated
What do you think about euribor/libor swap curve derived risk free rates?
Thank you professor.
I would like to read lecture notes for the videos, but where can I find one?
Gracias, me sirve para mis clases de valuación
Inspiring sharing session
I do not understand why do not take the USA 10YTY and add the country risk premium of the company’s country you’re trying to valuate. In a global world, a Rwanda investor can buy a 10YTY bond in USA.
same doubt
Thank you so much, Sir.
Hi Sir, with regards to the risk free rate. As there are multiple government bonds in circulation with various YTM, should we pit a bonds' interest rate with similar YTM to our investment horizon (I.e 5 Year YTM Bond interest rate to a 5 year investment horizon)?
great video, i have a question. said country government bond rate - CDS = risk-free rate of the said country in nominal rates. but when i use step 1, the CDS calculated was way off from the moody's credit rating. am i doing something wrong here?
I couldn't keep up with the final scenario if your country has no rating, CDS spread or a dollar denominated bond. So after finding a rated country with the same risk score, how do I arrived to a default spread? would you mind elaborating on that?
Sir, Where can we get live CDS spreads of all countries. Any specific website we can look into
2:19 "once you pick the currency in which you are going to estimate the cashflows, your discount rate has to be exactly in the same currency".
One question for us third world folks;
What if the project's initial outlay is in USD and the projects subsequent cash inflows are in the local currency (a common occurrence in third world economics is that the initial project equipment/expertise are imported from first world countries and the subsequent cashflows are generated from the local economy in the local currency. In this case, which currency do I use to evaluated the project and the subsequent rate?
Of the local economy because that is where cash flow is comming from and the imports are just expenses/liabilites...
Thank you so much.
Thank you so much kind sir.
if risk free rate is 4.8% and expected inflation is 3.2% if the expectation inflation change that expected inlation rises 4.5% what will new risk free rate be
This guy is an absolute master at teaching. He can teach differential calculus to a potato if he wants to.
so if i am an european investor who has euros and wants to invest in a us company at a us stock exchange, say microsoft or apple, what should be my risk free rate then?
I just looked up my country goverment bond 10y and the number is negative? Also saw that Germany is -0.51. That doesn't make sense. As a bond holder I will lose money. Should I use this negative number as a risk free rate then?
can we get access to the look up table ?
I am quite in awe of what you allude to but am struggling to come to terms with all the factors that determine valuation. How do I overcome this challenge?
Me too... I hate being spoken at with endlessly. Also, I am starting to think we are not going to see a structured valuation since all we get are fairly Microsoft Paint equivalent graphs and zero spreadsheets/data.
Im literally in a third world country and I have access to this quality of content🤯.......for FREE!!!??
Simply WOW
Very, very interesting but the learning curve is too steep for me. Any youtube videos I should start with for an amateur investor?
if a country has rating of Caa3 and treasury bond rate is 9% , then according to sir Risk free rate is negative? Is it possible ?
What if the Bonds are not dollar-denominated? Even in this situation can I deduct the default spread? Example: Indias 2030GS Rate is 6.14%, According to the Damodaran website the spread is 1.95% so can I take risk-free rate as 6.14-1.95???
insane 💯❤️🙏
At any point is a case study done in this series picking a well known company?? Please let me know
In the case where you have to use the rating assigned by the rating agencies to obtain the default spread, wouldn't you have to adjust that spread corresponding to inflation of the country that you're applying it to ?
He mentioned taking the i-Bond or the TIPS Bond - it is a bond that has a fixed rate + inflation-adjusted modifier.
8:54 why long term bond rate? regarding the dcf-model doesn't it have to be the government bond rate depending on the year of the estimated cash flow, in other words for cf1doesnt the risk free rate have to be that of a 1y-government bond, cf2 risk free rate of a 2y-government bond,...cfn ny-government bond?
Thank you very much!It is not easy, but the explanation was crystal!
I have read that the real Discount rate is Inflation Adjusted, hence 7 and a quarter is not Nominal Discount rate but Real Discount rate. Please clear the doubt
Point of correction professor, All government debt are risk-free unless they issue that debt in other countries currency. At that point it seize to become a risk-free since it has no control over the printing press of that currency. That was what happened to Argentina. Instead of issuing debt in their own currency, they choose to issue debt in U.S dollars which is one of the most stupid thing any government can do. But unfortunately developing and emerging countries continue on this unintelligent path when issuing debt.
Great lesson sir! Wanted to check - yes there is nowadays a non-0 probability of the US defaulting. So in this case we take the UST 10yr rate and subtract an estimate of risk / spread. But this would only reduce the Risk free rate, and hence the discount rate, which in effect would give rise to a larger number on valuation? So the riskier it gets, the more the value? Clearly I'm missing something here.... +Aswath Damodaran
To the best of what I understood : Riskier the discount rates, more valuables the other assets become. For example, when UST gets riskier, ofcourse the UST rates should fall - but that makes other assets more attractive (compared to the so-called risk free asset like US T-Bonds).
The risk free rate is only one input in determining the Cost of Equity and/or the discount rate to be used in the PV calculation. The professor is just explaining how to determine this input for a risk free rate under different scenarios of sovereign riskiness. Please see the episode 3 PDF for further information at this URL:
people.stern.nyu.edu/adamodar/pdfiles/valonlineslides/
Thanks 3000
Thanks
Sir can we get Full course ? thank you 🙏
How do we estimate default spreads????
can someone explain why we substract the BZ default swap rate of 1.7% from the 10-yr BZ gov bond of 9% to get the risk free rate. I thought we add it, so we get the risk free rate charged by international investor to account for currency risk?
Where can one get the CDS data?
can I download the slides shown?
Sorry, Beta relative to market portfolio could be an index?
whether you make a table of ratings and spread for 2024 or not ?
If you are brazilian, or want to do valuation of brazilian companies, here is the link to the CDS for Brazil: www.worldgovernmentbonds.com/cds-historical-data/brazil/5-years/ now, september 2020, according to CDS the risk of default is about 3,23%. As american bonds are for all that matter 0%, since Brazil have a dollar bond with a rate of 3% I should say that this works like a sharm!
Can anyone tell me if we can use the fix deposit rate of interest as risk free rate?
Dear Sir, if we prepare projected cash flow for a period of 5 years and then determine valuation accordingly in such instance can i consider risk free rate based on 5 year government bonds or do i need to consider 10 year government bonds. Kindly advice.
He did mention, that even if our time period is over, the cash flows tends to continue or something like that so he did say to choose the furthest away bond rate( 30 year) however with 30 year bond rate it is difficult to get the appropriate default rates hence he sticks to 10 year bond rate.
Not sure if i answered it right but this is based off of my understanding.
Also it's been 6years since you asked this question i don't even think it matters to you anymore🤣.
Watching this as a valuation analysts!
Please help me to understand something, is the risk free rate = default spread of the country?
@@renatoalferesnoronhamendos7240 I believe that: base-rate for a developing country = risk-free (say US) + default spread of the developing country
@@hzhuhugo I'm looking to understand for a risk free rate for an undeveloped country, that does not have a 10y bond
what do negative rates mean for the valuation framework?
very good question!
what's the market portfolio? does it depend on the currency or is it a world portfolio like the msci world index? if it depends on the currency take a look at the us market e.g.. why is often used the s&p 500 as the market portfolio and not the s&p 1200 as it is much more diversified compared to the s&p 500? this all makes no sense to me.
Listening to Aswath makes me realize how dumb I am.
The legend
Love from ur country
Hi the sessions are really nice, is there a book from which i can study all of this??
Sankalp Singh yes there is. The name is "Investment Valuation" by Aswath Damodaran. The subject is the same as the lectures, but he goes into a lot more detail.
@@Mitologicc thanks a lot man
how to you find a rf for a country that has no 10 year T-bond, and that has only issued 1 year bonds 3 years ago and none since? (I am talking about Saudi Arabia)
I would suggest you to find the USD equivalent discount rate by adding the default spread using the country ratings and then converting it to Saudi riyal terms by scaling it on inflation parameters for both countries. This would give you the rate in Riyal terms with default risk. Now to make it risk free you should probably scale the default spread ascertained through country rating by scaling it on inflation parameters and then subtracting it from the above riyal discount rate to finally get a Risk-free Riyal rate.
Makes sense ?
look at cds market
Risk hai toh Ishq hai!!!!!!!!
Gold. Should I own Gold bullion, considering the inflation/stagflation that’s likely coming?
It has no intrinsic value, so non of us interested in Valuation could answer that. I hope it helps.
Nominal cash flows do not reflect expected inflation though.
Can anybody explain me why an increase in risk free rate would logically lead to an increased CAPM and therefore to a decreased asset value, as CAPM is the denominator when we discount cash flows in a equity based model?
Isnt a high risk free rate better than a lower one?
Is this any related to the fact that if risk free rates spike, then nobody would invest money in stocks causing assets demand to decline and consequently their prices to fall?
A higher risk free rate would mean that you're discounting the future "Certainty Equivalent Cash Flows"(as seen in the last video in this playlist) with a bigger denoinator (Rf), thus resulting in a decreased valuation.
In CAPM 5:44, the second Rf tterm is bieng multiplied by Beta. if the Beta was = 1, the change in Rf would'nt do any thing as both Rf term would cancel eachother out. But if the Beta is >1 (which it mostly is), an increase in Rf would decrease the Expected Return as now the negative term of Rf, as can be seen in the right end of the formula, would be greater than the standalone positve term of Rf.
And if Beta is
@@PeyushSaini96 CAPM= Rf +b×(Ri-Rf)
CAPM1= 2.5% + 2×(6%-2.5%)= 9.5%
CAPM2= 3.5% +. 2×(6%-3.5%)= 8.5%
So here, an increase in Rf causes a decreased CAPM, meaning a smaller denominator and so an increased asset value, right?
@@alessandrobozzini8144 yes yes exactly
What should I do when the risk free rate is negative?
The real risk free rate has been negative for a decade. Around 2012, I was looking for academic research on the implications of negative rates. Academics are usually about ten years behind reality. I don't how he can teach these concepts with a straight face. The markets are so manipulated these days. The whole paradigm of finance collapses with a negative real-risk free rate.
The answer to your question really depends on your objective: are you a retail investor trying to protect your hard earned money? Or are you a salaried finance professional (professor, institutional investor, bank employee) who wants to further their career?! Because the answers are very different 😅
@@rachanaraizada Retail investor I would say.
@@giacomocampagnola5348 Very hard times for investors with small amounts (under 1 million euro). As much as possible I would try to stay out of the financial system (avoid playing in the markets) and invest in physical assets which generate a cash flow. But that is very difficult. If you're in Italy, I thought this was a good offer. I wonder if they will do another one.
www.ilsole24ore.com/art/cdp-tutto-esaurito-bond-retail-l-offerta-alzata-15-miliardi-ACeXdDR?refresh_ce=1
Would someone mind explaining to me why he chose Germany for his Euro denominated risk-free rate? I couldn't quite understand that part.
dbzhoa What other options are there for euro?
The rate on German Bonds is the lowest out of all European countries, it's just as close as it gets to a Euro risk free rate
Can anyone explain me why is Greece's short term treasury bond yield are higher compared to the long term bond yield? Its shown in the chart of EU's Rf's.
Golam, please assume a simplified case when both bonds (with the maturities of 2 and 10 years) are discount bonds (they pay no coupons). Now assume that the 2-y bond yield is 20% and the 10-y bond yield is 15%. It means that the prices of the 2-y and 10-y bonds are 64% and 19.7% of the nominal (face) value now, respectively. To simplify more, let's assume the recovery rate of both bonds is 0% (if Greece defaults on its sovereign debt, you get nothing at all). Suppose the market assumes the default rate (risk) for Greece (the probability it defaults) is 18% during the first year, and, if it doesn't default during the next year, the probability it defaults during the second year is also 18%. It means that the expected payoff in 2 years (if you buy the 2-y discount bond) is 67.24% of its face value. We recall that it is trading at 64% at the moment. It means the investors are ready to get 67.24/64=1.051 (5.1% for 2 years investment) = 1.025 (exactly 2.5% annual compound return). This 2.5% will be the 2-y EUR risk-free rate. Now suppose the market assumes the default rate (risk) for Greece in each year after the second (if it survives the first most difficult two years) is 10% each time if the government hasn't defaulted during the previous year. The expected return in 10 years will be 0.82*0.82*0.9*0.9*0.9*0.9*0.9*0.9*0.9*0.9= 28.9% of the face value, which is 28.9/19.7 times higher than the current price, which is 47% premium, or 3.9% annual compound return. What is going to happen with the market price of both bonds if Greece doesn't default by the end of year 2 in 2 years. The price of 2-y bond will climb from 64% up to 100% of its face value. If one asks what the price of the 10-y bond will be in 2 years, in its estimate one thing is certain: the remaining 8 years' risk-free discount rate (if nothing changes) will be in the range of 2.5-3.9%. Because 8 years is longer than 2 and shorter than 10. So the expected price will be in the range of (0.9^8)/(1.025^8) and (0.9^8)/(1.039^8) or 26.7-34.0% of its face value. Therefore if Greece doesn't default, the 10-y bond price will rise from 19.7% to 26.7-34.0% by the end of year 2. It will give a higher than 20% return, but this is only because the risk-free portion was definitely higher than 2.5% due to the more delayed maturity.
Short term is higher risky than long ter5
what is deford free?
Hello,
I thought real cash flows means adjusted for inflation while nominal cash flows don't consider expected inflation?
For example, real GDP adjusts for inflation. But why is it the opposite for cash flows?
Can anyone explain this, I have same doubt.
Real cash flows ARE adjusted for inflation, nominal cash flows are not.
can anyone explain difference between nominal terms and real terms valuation?
Real valuation is adjusted to inflation like things.
I can use this voice when I want to sleep
I feel like I'm having a stern talking to by a concerned uncle about my lifestyle choices.
Hello.sir tamil la books eluthunga sir plz
Shoutout to all my Rwandans!
Judging by the number of likes, I'm guessing you're the only one here....
More than 2% for 10y Bundesanleihen, that's like a dream
Who all are here because, Rajan Singh mentioned about Aswath Damodaran ?
*Doubt regarding CDS spread*
Dear sir my questions are-
1. From where can I get cds spread for sovereign? I have given my a lot time on google and also tried to find it on bloomberg but couldn't find anything, please help.
2. How did you start with rating-based default spread? I noticed in your excel file that you just changed previous year default spread by average change in cds % change. I want to know how did you get default spread for the very 1st time? Is it just taking cds spread and see the rating against available sovereign and estimate for left or something else.
Please help.
He moves along so fast, it's very hard to follow.
5:37
The background was helpful but the actual instructions are unclear:
- For US take 10yr bond rate ("but have to think about its default risk')
- For Euro take German bond rate
- For EM take bond yield "and subtract default spread"?!
- or for EM take bond yield "and add CDS yield"?!
Sounds contradictory