Question

Consider two investment options: • A U.S. 10-year treasury bond promises to pay you $50 per year for 10 years and then return $1000 principal amount • A North Korean 10-year bond with the same cash flow structure; that is, 50 per year and 1000 at maturity Which bond would you expect to be more expensive? Explain your answer in terms of risk and return and by referring to the components of the YTM of a bond.

Answer 1

Answer :-

Here both the bonds have the same maturity period and the same cash Inflows and the Cash Outflows

Now the price difference of the bonds is due to the Economic conditions of the North Korean and U.S

Now I expect that the bond of the US is more expensive.

The economic conditions of the U.S is very good as compared to the North Korean so the interest rates are low in the U.S and High in the North Korean.

The YTM of Both the bonds are to be different as per the country conditions. There is a high risk in North Korean and low risk in U,S. But the annual coupon rate is same