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FRM Part I · FRM Exam Part I · Country Risk: Determinants, Measures, and Implications

A country's sovereign bond yield (in US dollars) is 7.5%, while a US Treasury bond of the same maturity yields 3.5%. The mature-market equity risk premium is 5.0%. Using the sovereign default spread as the country risk premium, what is the total equity risk premium for the country?

The total equity risk premium is 9.0%. The sovereign default spread is 7.5% minus 3.5%, or 4.0%, which is used as the country risk premium and added to the 5.0% mature-market equity risk premium.

  1. A9.0%Correct
  2. B8.5%
  3. C4.0%
  4. D1.5%

Explanation

Default spread = 7.5% - 3.5% = 4.0%. Total ERP = 5.0% + 4.0% = 9.0%. The 4.0% option omits the mature premium, and 8.5% wrongly adds the Treasury yield less 0... it mixes in an incorrect base.

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