Considerations in the Choice of the Appropriate Discount Rate for Evaluating Sovereign Debt Restructurings
IMF Policy Discussion Papers, December 1, 2005
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- Considerations in the Choice of the Appropriate Discount Rate for Evaluating Sovereign Debt Restructurings
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Bibliographic details
- Authors: Julie A Kozack
- Published: December 1, 2005
- Series: IMF Policy Discussion Papers
- DOI: https://doi.org/10.5089/9781451975840.003
Summary
- Assessments regarding the effectiveness of sovereign debt restructurings are often summarized by comparisons of the net present value of debt service before and after the restructuring.
- These calculations are inherently sensitive to the choice of discount rate.
- The paper explores issues that arise in selecting discount rates when evaluating sovereign debt restructurings.
- It suggests using a range of discount rates and centering the analysis around the internal rate of return to assess whether the debt restructuring has generated net present value savings or costs to the debtor.
Major analytical themes and considerations
- Sensitivity of NPV comparisons to the choice of discount rate.
- Importance of selecting an appropriate discount rate when evaluating sovereign debt restructurings.
- Use of a range of discount rates rather than a single uniform rate.
- Centering analysis on the internal rate of return to determine NPV savings, costs, or neutrality for the debtor.
Policy- and practice-oriented recommendations
- Use a range of discount rates in NPV assessments of sovereign debt restructurings.
- Center the analysis around the internal rate of return (IRR) to determine whether the restructuring produces net present value savings or net present value costs to the debtor.
Subject areas and keywords
- Subjects: Asset and liability management, Debt restructuring, Debt service, Debt sustainability, Discount rates, External debt, Financial services, Yield curve
- Keywords: associated NPV calculation, calculations to the choice, Debt restructuring, Debt service, Debt sustainability, debt-service payment, default premium, Discount rate, discount rate range, Discount rates, financial crisis, Global, net present value, NPV calculation, NPV cost, NPV estimate, NPV neutral, NPV saving, PDP, savings from the perspective, sovereign debt restructuring, stock concept, uniform discount rate, Yield curve