Question

Corporate Bond Yields and Liquidity Risk: An Analysis of U.S market . What are the determinants of returns on corporate bonds? Since corporations may default, the returns on their bonds must incorporate a premium for such risk. For safe (so-called “investment-grade”) bonds however, the risk of default is very low (less than 0.1%) and cannot explain the returns observed. What other factors are at play? Does market liquidity risk affect the pricing of corporate bonds? How are the yields of Bangladesh corporate bonds determined?

Answer 1

Determinant of Return of the corporate bonds are as follows-

A. Credit quality of the bonds because when there would be a lower credit quality,there would be a higher rate offered in order to compensate for the lower credit quality.

B. Time duration of the bonds are also playing an important role in determinant of the return of the corporate Bond

C. interest rate which are prevalent in the economy are also important in order to determine the rate of return associated with the bond.

D. Economic cycle and the performance of the company are also important in determining the return of the bond.

market liquidity risk are also playing an important role in determining the price of the corporate Bond because when the bonds are lower liquid, it will mean that these bonds will have to compensate with a higher rate of return to the investor because investor will be feeling highly insecure due to lower liquidity of these bonds and hence when there would be a lower liquidity, then there would be a compensation for higher rate of return and when they would be a higher Liquidity,then these bonds are to be offered with a normal rate of return so liquidity of the market are also playing an important role in rate of return of the corporate bonds.

Yield of the Bangladesh corporate bonds will be determined after ascertainment of a higher degree of risk related to default because Bangladesh is a developing economy and it will be having a higher degree of risk associated with investment grade bonds and there would be a higher probability of failure so there would be a higher rate of return offered on these bonds in order to compensate for such risks.