Question

After fifteen years in the debtors’ doghouse, Argentina has reentered the bond market. When the country defaulted on its debts in 2001, the bondholders resorted to various maneuvers to try and secure their funds, even going so far as to seize an Argentinian navy ship. But this new bond issue seems to be welcomed by investors, with demand far outstripping supply, possibly due to a healthy interest rate in a time of low or negative interest. Discussion Points: 1) What did you find surprising about Argentina’s return to the bondmarket? 2) The article discusses the high demand for the bonds and the high interest rates. Would you expect the bonds to sell at a premium or a discount? 3) Depending on your answer to question two, how will the investors account for the transactions? What about the bond issuer?

Answer 1

1) Argentina has been in a very turblunet position in terms of their economy. They are currently facing an inflationary crisis and the government has limited monetary room to bring the country out of recession. So inorder to bring the country out of recession, Argentina has accessed the bond markets, which has been taken very positively by the investing community. The thing which suprises me the most is the interest shown by the investors in those bonds, considering Argentina's poor history with its previous tango with bonds and despite the fresh issue having a credit rating of "High Credit Risk"

2) I would expect the bonds to sell at a deep discount for the following reasons, i) There is a high credit risk embedded in their economy, and investors would like to be compensated for taking that risk by higher returns, ii) Considering that previous bond holders were asked to take a massive hair cut after restructuring, new bondholders would like to have a higher margin of safety in terms of the price

3) The investors would account for the bonds in their long term assets (investment in financial instruments), whereas the bond issuer will account the bonds using the HTM (Held to Maturity) method