Money Supply And Risk Premium

Until June2013, there is no real default on open-raised bond market. Although some bond issuers have mobility difficulties, but most of them overcome the problems with the assistance of government and bank. Rigid payment affects the risk premium of bond. The risk premium is usually lower than the implied value. Until now there rarely any research on how rigid payment influences the risk premium.To research how rigid payment influences the risk premium, we use two methods, namely theoretical modeling and empirical analysis. The theoretical modeling can be divided into two parts:the situation that there is no rigid payment and the situation that there is rigid payment. According to the theoretical modeling, the credit risk premium of bond may go higher when money supply goes higher.To test the results of theoretical modeling, we did empirical analysis on risk premium and money supply. We find when there is rigid payment, the risk premium will be lower than its implied value. According to the empirical analysis, the credit risk premium of bond may go lower when there is more money supplied. So results of theoretical modeling were correct in part.