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Brady Bonds and Default Probabilities
Author:
Ivailo Izvorski null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1998: Issue 016
Language:
English
Publication Date:
01 Feb 1998
DOI:
https://doi.org/10.5089/9781451843378.001
ISBN:
9781451843378
ISSN:
1018-5941
Pages:
24
Keywords:
WP; default probability; default; bond; price; Brady bonds; default probabilities; sovereign riskiness; Brady bond issuer; discount Brady bonds; probability of default; default probabilities Index; Bonds; Collateral; Yield curve; Asset prices; Treasury bills and bonds; Eastern Europe
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper computes the default probabilities implicit in the prices of Brady bonds of seven developing countries and examines the factors that determine the high cross-correlation of the probability paths. The term structure of U.S. interest rates and the ratio of long-term foreign debt to GDP, together with a developing market index, explain more than 75 percent of the cross-sectional distribution of the default probabilities. The paper also demonstrates a new way to extract sovereign riskiness, implicit in traded bond prices. This allows the above results to be interpreted as explaining the cross-sectional distribution of sovereign riskiness as well.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund