ABSTRACT

At the moment, peso-denominated Mexican bonds pay an interest rate of about 30 percent, while ten-year U.S. Treasury bonds only pay about 4.2 percent. There are three reasons for this differential in interest rates. The first is that Mexico has tended to be politically unstable in the past, although it is more stable in the present. The second is that Mexican bonds are in pesos and American bonds are in dollars. The American dollar, and now the euro, are international currencies and are easily exchangeable across borders; this is not true for the peso. The third reason is that the peso is more likely to be devalued than the dollar. For these three reasons, Mexican bonds are much riskier than American bonds, and therefore a premium has to be paid (a much higher interest rate) in order to induce people to buy them. Bonds also represent long-term promises to pay annual interest and to pay back the principal at the final term of the bond.