Question

9. Your sister in law wants to invest her money in a bond in Russia, because the interest rate she can get is over 12% compared to 2% or less in the US.

What things does she need to worry about that might make her investment not as profitable as she hopes? (Write a minimum of 100 words in your answer)

Answer 1

Answer -There are two main things which need to be looked here.

The first is the rate of inflation. For comparing the retruns on the investment , the real interest rate must be looked for. If the rate of inflation will be greater in Russian, it might happen that the real interest rate in Russia is less than that in US. If this happens , the investment in Russia , will be the one at loss.

Secondly , the exchange rate should be looked after. If the Russian currency is of more value than US dollar, then only there is benefit in investmenting there. But if US dollar is more valuable , investment should be done in US.

The economic risk will also matter. Risk gives higher returns but may also lead to default.

Hence these factors must also be looked for before investing the money in bonds just on the basis of the interest rates.