How the german bonds could have generated a higher yield

Reference no: EM131227285

International Bonds:

The pension fund manager of Utterback (a U.S. firm) purchased German 20-year Treasury bonds instead of U.S. 20-year Treasury bonds. The coupon rate was 2 percent lower on the German bonds. Assume that the manager sold the bonds after five years.

The yield over the five-year period was substantially more than the yield the manager would have received on the U.S. bonds over the same five-year period.

Explain how the German bonds could have generated a higher yield than the U.S. bonds for the manager, even if the exchange rate was stable over this five-year period. (Assume that the price of either bond was initially equal to its respective par value.) Be specific.

Reference no: EM131227285

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