Country risk is reflected in the difference between the interest rate paid by the Chilean government and the interest rate paid by the US Department of the Treasury on bonds issued with the same maturity and conditions.
The higher interest rate means that credit for the Chilean government is costlier because investors suppose that lending it money is riskier than lending money to the US government: they perceive that the country risk is greater and that Chile’s payment capacity is lower; consequently they require a greater return to compensate for this additional risk.
Country risk is measured in basis points, where 100 basis points is equal to one percentage point. The level of country risk sets an interest rate floor, or minimum, at which companies and consumers will be able to borrow money, both domestically and internationally. So the higher the country risk, the higher the interest rates will be for the private sector.Permalink
Changes in country risk are determined by investment banks, such as J. P. Morgan, or by institutions that provide financial information, like Bloomberg. In both cases, this information is confidential, and subscription is required for access.Permalink
This is related to country risk, which is the difference between the interest rate on a US Treasury issue and a similar issue of another government.Permalink
Credit rating agencies that evaluate Chile are: Fitch, Moody´s, S&P, JCR, KBRA and Dagong Global Credit Ratings.Permalink
The credit ratings assigned by these agencies to the Chilean government reflect their assessment of the probability, or risk, that the government will fail to repay its current and future obligations. Reports on sovereign or country risk send the market a very important signal that could have consequences on interest rates for borrowing for the private sector.
A better or higher rating means lower country risk, which could translate into lower interest rates and borrowing costs for the government and the private sector.Permalink
A number of factors are considered in determining a credit rating, and the relative importance attached to each varies among the different rating agencies.
The main factors include: political and institutional stability, consistent macroeconomic policies, GDP growth, the sustainability of fiscal accounts, per capita product, public and private foreign debt, the degree of international trade and financial integration, the diversification of exports in terms of both markets and products, among others.Permalink
The calculation convention for the secondary market is ACT/365 (end of period).
However, the coupon payment is calculated with a 30/360 (end of period) convention. Therefore, semiannual coupon payment is always the same: nominal amount *coupon rate/2. The bonds are bullet, thus capital is paid at maturity.Permalink