Argentina\'s Madcap Century Bond Has Beaten Treasurys WSI May 17, Anyone [US inv
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Argentina's Madcap Century Bond Has Beaten Treasurys WSI May 17, Anyone [US investors] who bought the Argentine 100-year when it was issu 2.5% from the slide in price,but made aprofit. exchange rate risk) 2018 ed-in dollars-last June has lost Bonds issues in dollars by a foreign entity do not have an When Argentina issued a 100-year bond last year it was taken by many as a clear case of market fr Investors could hardly get more enthusiastic about emerging markets than lending money tor a cen oth. tury to a country that averaged one default every 25 years since its founding. So, with Argentina now asking tor emergency rescue from the International Monetary Fund it looks like the skeptics were Anyone who bought the Argentine 1 right. Right? 00-year when it was issued-in dollars-ast June has lost 2.5% from the slide in price, but made sti same time would have lost money, with ill made a profit. By contrast, buying the U.S. 10 year or longer Treasury bonds at the the 10-year down 7.1% in price. Price change Argentina 7 1/8%-coupon US Treasury 2 1/4% due Feb. 15, 2027. U.S. Treasury 3% due Feb. 15, 2047. 15% 10 -5 -10 July 17 Dec. May 18 Benchmark 10-and 30-year bonds at start Source: Thomson Reuters Datastream QUESTION: Explain how the above statement can be true with regards to making money on this 100 year ond?Explanation / Answer
This is a clear example of risk - return tradeoff.
Whilst the Argentinian bond has a higher coupon given the country's higher indebtedness and lower creditworthiness(in order to attract investors the bond will have to provide a greater incentive in the form of a higher coupon), the treasury bond, has a lower coupon to compensate for the lower risk as treasury bonds are very highly rated.
Lets make some quick calculations here:
Price of bond when purchased: 90 (assume), Par value = 100
Current price after decline by 2.5% = 90 - 2.5%*90 = 87.75
Coupon recieved in 1/2 year = 0.5*7.125% * 100 = 3.56
Total value of the investment in 1 year = 87.75+3.56= 91.31.
Effectively we have still made a profit of 1.31$ despite a decline in price.
For the treasury bond:
Semi annual coupon = 2.25/2 = 1.125.
Purchase value ( assume it was offered at a discount, like the argentinian bond) = 90, Par value = 100.
Decline in price = 7.1%, so current price is 90 - 7.1%*90 = 83.61
Total current value of investment made = 83.61+1.125 = 84.735.
Original investment was = 90. Loss of 90 - 84.735 = 5.265
Clearly, the Argentinian bond despite the fall in price will still earn you a profit despite the fall in price!
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