In December 2001, Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction oftheir previous value. A few years later, Argentina announced it would pay back 25% ofthe face value of its debt. Comment on the effects of information asymmetries ongovernment bond markets. Do you think investors are currently willing to buy bondsissued by the government of Argentina?
Question
In December 2001, Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction oftheir previous value. A few years later, Argentina announced it would pay back 25% ofthe face value of its debt. Comment on the effects of information asymmetries ongovernment bond markets. Do you think investors are currently willing to buy bondsissued by the government of Argentina?
Solution
The situation in Argentina in 2001 is a classic example of how information asymmetries can affect government bond markets. Here's how:
-
Information Asymmetry: In this case, the Argentine government had more information about its financial situation and its ability to repay its debt than the investors did. This is a form of information asymmetry, where one party (the government) has more or better information than the other party (the investors).
-
Effects on the Market: When the Argentine government announced it would not honor its sovereign debt, this created a shock in the market. Investors who were unaware of the government's financial situation were left holding bonds that were worth much less than
Similar Questions
Provide two (2) reasons why the vield on 10-year Government Bonds ssued in Argentina may behigher than a 10-year US Treasury Bond
All else being equal, if a central bank sells government bonds from the market it would:Group of answer choicesdecrease the money supply.most likely decrease savings in the economy.mean the supply of loanable funds would move to the right.decrease interest rates.
Holdings of government bonds are classified on a bank's balance sheet asGroup of answer choicesliabilities, because the bank must borrow in order to be able to invest in the government bonds.assets, because the markets for government bonds are the most liquid in the world.liabilities, because the government bonds must be pledged as collateral against borrowing.assets, because investing in government bonds represents a use of funds for investment.
When an investor looks into corporate bonds, they should never weigh out the possibility that the company may default on the debt.Select one:TrueFalse
The buying and selling of government bonds by the central bank is called:ResponsesA open market operationsopen market operationsB fiscal policyfiscal policyC bank bailoutsbank bailoutsD government bond barter
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.