Question

Bloomberg.com - Markets

  Rates & Bonds

10 Year Government Bond Yields   Country	Yield
United   States	0.68 %
Canada	0.76 %
Mexico	7.3 0%
Switzerland	-0.38%

a) Assuming that bond rating agencies, such as Moody’s and Standard & Poor’s, have rated the government bonds of the US, Canada, Switzerland, and Germany free of risk of default-with a grade of AAA - how do you explain the apparent differences between, the US bond rate on the one hand and the Swiss bond rate and the Canadian bond on the other hand? Explain the theory behind this.

(b) How do you explain the apparent difference between the US bond rate and that of Mexico’s if Mexican Bonds are ranked riskier than that of the US?

              Now consider the following chart:

where the left vertical axis indicates the difference between the 2-year German bund rate and the 2-year US treasury bond rate- shown in black, while the right vertical axis indicates the rate of exchange defined as number of US dollar per one euro, shown in blue.

            (c) What pattern do you observe as displayed by the above chart and what conclusion do you draw? Discuss fully.