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Analysis of the Risk Premium Factors of Corporate Bonds

Student: Ryzhova Kristina

Supervisor: Anna Novak

Faculty: Faculty of Economics

Educational Programme: Finance (Master)

Final Grade: 10

Year of Graduation: 2020

Currently, there is a growing interest in issuing corporate bonds. Corporate bonds are highly competitive among other investment instruments, because they have a fairly high yield and attract investors. However, every investor should understand what returns they can expect when investing in a particular investment asset. At the same time, when investing money in corporate bonds, the investor exposes himself to a certain risk. Therefore, in order to make an effective investment decision by measuring the ratio of risk and bond yield, each investor needs to evaluate all possible factors that can affect the yield of the investment object chosen by them. This research is devoted to the analysis of factors that influence the excess yield of corporate bonds. In this regard, the purpose of this work is to identify, analyze and evaluate the determinants that affect the risk premium of corporate bonds in the non-financial sector of the economy. The research aims to: 1. Study the theoretical aspects of risk premium analysis for corporate bonds; 2. Identify the degree of development of this topic by reviewing the scientific literature on the analysis of risk premium factors for corporate bonds; 3. Identify the main factors that affect the risk premium when investing in corporate bonds; 4. Formulate hypotheses about the nature of the influence of the studied factors on the risk premium for the purposes of econometric analysis; 5. Conduct an empirical analysis, namely, to build an econometric model of the dependence of the risk premium for corporate bonds on the studied factors. To achieve the main goal of the work, the regression model of the dependence of the risk premium for investing in corporate bonds on the studied factors was developed. In the part of econometric analysis, a large part of the theoretical hypotheses were confirmed. It was found that there is a parabolic relationship between the maturity and the risk premium. However, variables such as call option, changes in the price of oil, the construction industry, the trade industry and the transport industry have a positive impact on the value of the risk premium for corporate bonds. Hypotheses were also confirmed that the issue volume, issuer rating, type of bond, type of organizer, GDP growth, and the energy industry have a negative impact on the risk premium. The developed model can be used by an investor to identify the risk premium for a certain bond issue with specified characteristics, which will allow making the right choice regarding the subject of investment. In addition, this regression model can be useful for the issuer in order to develop an optimal credit policy of the enterprise. Using the specified parameters, the issuer can calculate the expected risk premium and select the optimal parameters of a bond loan to achieve the required risk premium.

Full text (added May 18, 2020)

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