Determinants of risk premiums on corporate bonds on the Swedish market

Abstract

The purpose of this thesis was to examine how investors acknowledge the four variables; earnings variability, period of solvency, equity/debt ratio and bonds outstanding to determine the risk premium on corporate bonds on the Swedish market. In order to achieve this knowledge we performed a quantitative study based on regression analysis and a hypothesis of Professor Lawrence Fisher. Our ambition was to replicate Fisher’s theory in the best possible manner to achieve reliable and valid results. Unfortunately, the limited supply and the illiquidity of the Swedish corporate bond market affected the validity of our research. The results of the study were inconclusive. According to our results, the investors on the Swedish market do acknowledge the length of time a company has been solvent and the amount of bonds outstanding of a firm when determining the risk premium of corporate bonds. Our study does not prove, on a significant level, that the earnings variability of a firm and the equity/debt ratio of a firm are relevant for determining the risk premium on a company’s bonds.