Figure 1 shows nominal yields on sovereign (i.e., government) two-year bonds. .

(a) The debt-to-GDP ratio in the U.S. is relatively high at around 100%, but its bonds pay a low nominal interest rate. Give a reason this might be so. .

(b) If inflation in Kenya is always 3%, what real return can purchasers of Kenyan bonds expect? .

(c) If you purchased a ten-year bond in Vietnam, would you expect its interest rate to exceed or lie below 12%? Explain. .

(d) In 2011 and 2012, Switzerland had annual deflation of around .5%. What real annual return would a Swiss resident earn from purchasing a Swiss two-year sovereign bond?

Figure 1: Annual Interest Rates (or Yields) on Two-Year Government Bonds in 2011

 

Two-year government-bond yields September 5th 2011 Highest, % Greece Portugal Venezuela Pakistan Vietnam Kenya Brazil 0 3 6 9 12 15 Nigeria Ireland India Source: Thomson Datastream 53.8 Lowest, % Finland Netherlands Britain Saudi Arabia 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Germany Hong Kong United States Singapore Japan Switzerland