Why two bonds with same interest rate not priced the same.
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Two different companies of approximately similar financial strength and with similar management teams both have 30-year bonds that trade in active secondary markets. Company A is located in a country with relatively small increases in overall price levels; its bonds have a 4% return. Company B is located in a country with relatively large increases in overall price levels each year; its bonds have a 14% return.
What is the difference in the interest rate between Company A bonds and Company B bonds called?
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Solution Summary
This explanation in everyday language explains the reasons and gives an example to illustrate. Suitable for novices to intermediate.
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The difference between the bonds is their market rate of interest in the two countries -- one has low inflation and so low interest rates and competing return opportunities. The other has high inflation and so it takes ...
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