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Your uncle has recently retired with two million dollars of superannuation funds. He wants to invest...

Your uncle has recently retired with two million dollars of superannuation funds. He wants to invest a part of his super fund to fixed income securities, preferably foreign government bonds. He found Germany Government bonds offering YTM of 3% whereas Greece Government bonds offering YTM of 5%. He got confused with two different rates since both of them are risk-free government bonds.

Explain your uncle the underlying cause of 2% differences in YTM between these two Government bonds. Assume your uncle is a risk-averse investor, offer him your valuable advice to invest one of these two securities.

Solutions

Expert Solution

The difference between rates of Germany governmental bonds and Greece governmental bonds are due to-

A. Inflation is one of the prime factor due to which the rates of Government Bonds of Greece and Government Bonds of Germany are offering with different risk free rate.

B. It is also due to the level of stability in the economy of both the countries because it is economic factor due to which there have been a difference in interest rates.

C. Different risk free rates are also associated with demand and supply in both the countries and it is also associated with the approach of the central banks as well.

D. Difference in risk free interest rate can also be attributed to exchange rate fluctuations in both the countries so it should be taken into consideration.

E. Monetary policies of both the countries and approach of the central bank of both the countries are also determining the level of the interest rates after ascertainment of various economic factors.

Since, he is a risk averse investor I will be advising him to invest into the bonds of Germany because Germany is a much stable country in comparison to Greece because Greece is having a risk related to default.

jeff jeffy answered 2 years ago
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