Credit Risk in G20 Nations: A Comparative Analysis in International Finance Using Option-Adjusted-Spreads

Abstract

Corporate bond yields are the manifestation of the cost of financing for private firms, and if properly evaluated, they provide researchers with valuable risk information. Within this context, this work is the first study producing corporate yield spreads for all S&P-rated bonds of G20 nations to explain their comparative riskiness. The option-adjusted spread analysis is an advanced method that enables us to compare the bonds with embedded options and different cash flow characteristics. For securities with embedded options, the volatility in the interest rates plays a role in ascertaining whether the option is going to be invoked or not. Therefore, researchers need a spread that, when added to all the forward rates on the tree, will make the theoretical value equal to the market price. The spread that satisfies this condition is called the option-adjusted spread, since it considers the option embedded into the issue. Ultimately, this work investigates the credit risk differentials of S&P rated outstanding bonds issued by the G20 nations to provide international finance professionals with option-adjusted corporate yield spreads showing the credit risk attributable to debt instruments. Detailed results computed using OAS methodology are presented in tables and used to answer the six vital credit-risk-related questions introduced in the introduction.

The Volatility of the “Green” Option-Adjusted Spread: Evidence before and during the Pandemic Period

“…In particular, enclosed options can let the issuer to call back the debt early or the investor to convert the bond into underlying company shares or demand early redemption. The OAS value is commonly expressed as a spread over the Treasury curve and possesses the benefit of allowing for the comparability between bonds with different redemption structures (Boliari and Topyan 2022;CDIAC 2020). It is the spread that must be added to obtain the theoretical price of a corporate bond, as calculated by the pricing model, identical to the observed market price (Choudhry 2004).…”