Aswath Damodaran 98
One solution: Look at a country’s bond rating and default
spreads as a start
! Ratings agencies such as S&P and Moody’s assign ratings to countries that
reflect their assessment of the default risk of these countries. These ratings
reflect the political and economic stability of these countries and thus provide
a useful measure of country risk. In September 2004 , for instance, Brazil had
a country rating of B 2.
! If a country issues bonds denominated in a different currency (say dollars or
euros), you can also see how the bond market views the risk in that country.
In September 2004 , Brazil had dollar denominated C-Bonds, trading at an
interest rate of 10. 01 %. The US treasury bond rate that day was 4 %, yielding
a default spread of 6. 01 % for Brazil.
! Many analysts add this default spread to the US risk premium to come up
with a risk premium for a country. Using this approach would yield a risk
premium of 10. 85 % for Brazil, if we use 4. 84 % as the premium for the US.
This appraoch is simple but it assumes that country default spreads are also
good measures of additional country equity risk. The question thought is
whether equities (which are riskier than bonds) should command a larger risk
premium.
