APPENDIX

# B2. Computing Returns: Data and Assumptions

**_Treatment of partial and missed coupon payments:_** A main challenge to compute total returns on historical sovereign bonds was to collect bond-level data on partial or missed coupon payments during spells of default. We retrieved information on interest servicing during crises from the historical reports of the UK-based Corporation of Foreign Bondholders (CFB) (1876-1944, 1945-1986), the US-based Foreign Bondholders Protective Council (FBPC) (1934-1940, 1945-1950, 1953-1964/67), the Association Belge pour la Défense des Détenteurs de Fonds Publics (1898-1915), and the French Association Nationale des Porteurs Franҫais de Valeurs Mobiliéres (1936-1945, 1948-1974, 1987-1988, 1996). To fill gaps, we also rely on the rich body of investor reports that we gathered for the long-run dataset of prices and restructurings (see Appendix B1 above and Appendix C1 below). Particularly helpful were reprints of (temporary) debt agreements, official announcements, or press releases of the debtor government. We typically extracted the relevant information on interest servicing from text statements such as: “Coupon due May 01, 1932 paid in Jan. 1933 at rate of 60% of the face value of the coupon.”  For most bonds we have exact amounts and dates of payments. In case the date of partial coupon payments is missing we assume that the debtor paid on the due date of the coupon (original deadline). In the case we do not find any indication that coupons are missing, we assume that they are fully paid. After gathering all coupon details, we again calculate accrued interest by equally distributing the (full or partial) payments over the original coupon payment period (eq. 5). For example, in the case of a yearly coupon frequency, we calculate returns by dividing the coupon paid by 12 (equal amounts per month).

**_Accounting for debt restructurings/ haircuts:_** We account for creditor losses due to a debt restructuring or debt write-off. We do so by combining the old defaulted bonds and the new instruments that creditors receive in the exchange with the implicit assumption that creditors keep the newly restructured bond in the portfolio. We also account for the share of debt written off as well as for potential cash or so-called “goodwill” payments that are made in the wake of a restructuring. More precisely, we create spliced series on prices, coupons and returns by combining the old and new bond in the month of the debt exchange.

In the case of a nominal debt reduction (face value haircut), bondholders receive a reduced total face value in new bonds compared to what they held in their old, defaulted bonds. We account for this by creating a spliced series of old and new bonds for which we multiply all post-restructuring bond prices and coupon payments by the size of the write-off. For example, in the case of a face value reduction of 40%, all future price observations of the new bond series are multiplied by 0.6 (1 minus the write-off of 0.4). Accordingly, to create the spliced series, we would also adjust all future coupon payments on the new bonds by multiplying them by 0.6. Cash payments agreed on in the wake of a debt restructuring, e.g., for the settlement of arrears or as deal “sweeteners”, are accounted for in the month in which they are made. For illustration, we can rewrite our baseline bond return Equation 2 for the month of the restructuring (when old bonds are exchanged into new bonds) as follows: restructuring (when old bonds are exchanged into new bonds) as follows: =<sup>NNnnssnn bbppnnBB,mm∗(1 −wwrriittssw</sup> −1 p<sup>ww) + CCnnssnn bbppnnBB,mm∗</sup><sup><u>(1 −wwrriittssw</u>ww) + CCshmm</sup> nnssnn bbppnnBB,mm RR BB bbppnnBB,mm−1 A10 NN