b. Sovereign Bonds

♤ A sovereign bond is a debt security issued by a national government.

♤ They can be either local-currency-denominated or denominated in a foreign currency.

♤ Unlike corporate bonds, the risks associated with these bonds are the exchange rate (if the bonds are priced in local currency), economic risks, and political risks that can lead to a possible default on the interest payments or principal.

♤ Sovereign bond defaults aren't very common and generally, they are low risk bonds and thus, provide low yield relatively.

♤ These bonds are rated by three most popular rating agencies - Standard & Poor's, Moody's and Fitch. They base their ratings on several factors such as

 Per Capita Income

 Gross Domestic Product Growth

 Inflation

 External Debts

 History of Defaulting

 Economic Development