Question

It has been identified that there is an importance in the relationships between bond characteristics such as coupon rate, time to maturity and yield. A further issue of importance to market participants is the long-term relationship between bonds of different credit (risk) classes, different maturities and in different markets.

a.  Why is it important to understand the long-term relationships between bonds with different risk classes and different maturities?

b. What does this paper conclude about the relationship between Australian dollar euro-bonds and Australian government bonds?

Answer 1

a) A bond with higher risk means higher returns on its principal amount so as to compensate the loss of taking extra risk and vice versa while a bond with large maturity period is having higher return in comparison to a bond having shorter maturity period, this is because in large maturity period bond, interest is being accumulated to the time extent of the bond.

b) an australian dollar eurobond is a bond issued in australian dollars which is issued and sold outside australia. The bonds are typically governed by UK law (rather than Australian law), are listed on a European exchange and traded and settled outside Australia while australian government bonds are The Commonwealth of Australia issues bonds called Commonwealth Government Securities. A form of these bonds is available for trading on the Australian Securities Exchange (ASX).