> The "country risk premium" is how much more a third world bond yields than
> the yield for a comparable US Treasury bond. So if the benchmark US
> Treasury is paying 5%, these are paying 25%. By buying these bonds, you
> are getting what you'd get for a holding a treasury bond plus this extra
> 20% for your troubles.
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> (a) bondholders have already been fully completely monetarily reimbursed
> for the risks of default through the original rate -- and they know it;
Consider the benefits to bondholders of the US Exchange Stabilization Fund "put" underneath this market as well. Bond speculators really made out in the Mexican 1993 and Russian 1998 bailouts, and buy-and-holders did nicely, too.
On the other hand, the yield must also compensate holders for price volatility. The bonds have a long duration for most of their lives, and many purchasers will not hold until maturity.
Chris