FIXED INCOME SECURITIESCredit rating process of

sovereign bonds with respect to Indian sovereign bonds

Submitted to Prof . Lakhani

Team

Lalit(96) Unnikrishnan (98)

Pooja (94) Rekha(104) Rachana(103)

Sovereign bond

Also knows as government bonds.

One of the oldest investment asset class in the world

Issued by the government.

Denominated in local or foreign currency.

Sovereign bond

s yield

Creditworthiness

Country Risk

Exchange Rate

Three major determinants

Extremely safe

High credit ratings

Lower yields

More risky

Lower credit ratings

Higher yields

Why to invest in sovereign

bond

safest investments

produce impressive

returnsissued by national

governments

Risk from sovereign bonds Government’s willingness to pay

Countries with 1. Weak economy 2. High debt burden 3. Weak or volatile currency 4. Little ability to collect taxes finds difficult to pay back its debt

Credit risk Currency risk Inflation risk

Ways to

protect

against

sovereign risk

Credit rating • Evaluation of the credit worthiness of a debtor

Sovereign credit rating

• credit rating of a sovereign entity, i.e. a national government

S&P

Moody’s

The players and the game

What Is a Sovereign Debt Crisis? WithExamples

• Greek ( Debt to GDP ratio reached to 175 %)• Iceland (Bankruptcy, took $62 billion debt

while GDP was only $14 billion)• Eurozone ( Took the advantage of lower

interest rates)1. Ireland2. Italy3. Portugal

S&p (BBB-)

Moody’s

( Baa3)

Fitch's(BBB-)

India’s credit rating

Determinants of Sovereign

ratings

• .

Effects of sovereign

ratings

Inflation Risk

Political Instability

Fewer Options

Indian economy forecast2015 2020 IN

Currency 64.81 58.43 -Stock market 26904.11 29700 Index pointsGovernment bond 10y 7.55 8.31 percentGDP 2066.90 2486 USD BillionGDP per capita 1262.64 2374 USDExport prices 21266.31 38179 USD MillionImport Prices 33744.28 49600 USD MillionInterest rates 6.75 4.5 percentGovernment spending 3100.18 2855 INR BillionCorporate tax rate 34.61 30 PercentGovernment revenues 3455.36 3868 INR BillionGovernment debt to GDP 65.50 64.09 PercentFDI 1943.00 3836 USD MillionCorruption rank 85.00 74 -