FRM Part I · FRM Exam Part I · Country Risk: Determinants, Measures, and Implications
Country Y has a 10-year US dollar-denominated government bond yielding 6.30%. The US Treasury 10-year yield is 4.10%. The 10-year sovereign CDS spread is 190 bps. Using the bond-spread approach, the country default spread is closest to:
The bond-spread approach subtracts the risk-free Treasury yield from the sovereign's dollar bond yield: 6.30% minus 4.10% equals 2.20%, or 220 basis points. The 190 bps CDS spread is a separate market estimate and is not used in this calculation.
- A190 bps
- B220 bpsCorrect
- C410 bps
- D630 bps
Explanation
Under the bond-spread approach, default spread = dollar-denominated government bond yield minus the Treasury yield = 6.30% - 4.10% = 2.20% = 220 bps. The 190 bps is the CDS-based estimate, a different measure, so it is not the answer here.
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