80

assuming the currency value with respect to USD stays stable in that year. This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price up (and ...


32

Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates. Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high. Rating agencies rate countries (like they do corporations) for ...


19

The other answers are correct, but I would like to explain the problem from a different perspective: When some scheme seems to offer you free money for nothing, then you should always ask yourself why someone offers you that scheme. Why would a foreign government offer you to give them a loan with a high interest rate when they could just as well give you a ...


9

Since this question got bumped, I decided to look at how such an investment would've played out over the last seven years. Today, Dec. 6th, 2017: 1 AUD = 0.758248 USD On Dec. 6th, 2010: 1 AUD = 0.987948 USD Thus, the Australian dollar has declined at an annualized rate of 3.71% over the last seven years. So that would eat most of the gains you would've ...


4

If you had $1,000,000 in cash in a brokerage account you could buy $100,000,000 of Bonds with that money. However, as the value of the bonds fluctuated you would need to add more money to ensure you were within the 1% margin requirement. If not, then your broker would be entitled to sell the bonds to meet the margin requirement. Could that same purchase ...


2

How can I take advantage of the fact that interest rates in Australia are almost 5% You can approach an Australian bank and ask them if they can take a deposit from a US person, and shop interest rates around. Different countries have different rules, but if you have enough money (and the banks will make enough profit) doors will open. The biggest ...


1

What you are describing is called Interest Rate Parity but without considering your fx risk (after earning interest in the foreign currency will I be able to buy the domestic currency back at the same rate). However you can remove the fx risk with a forward fx swap. https://en.wikipedia.org/wiki/Interest_rate_parity Arbitrageurs can use covered-interest ...


1

Their interests rates are not high because the borrowers are stupid. They are high because they have a lot of inflation, so the 1 billion simoleons you borrow today is worth a lot more than the 1 billion you pay back in 1 year. For the lender to break even, you must also pay for the inflation on top of default risk. This is actually the case everywhere, but ...


1

IMHO, this is a bad idea unless you understand the economy of the country you mentioned. No two country is the same when coming to similar high bank interest rates. There is a chance that the currency inflation and bad exchange rates may wipe out your interest gain. A country exchange rate is highly dependent on the country currency flow, i.e. Foreign ...


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