If the bonds of two different countries are identical, their expected returns will:
A) be equal if capital flows freely internationally.
B) always be equal.
C) be equal only if the exchange rate between the two countries is fixed.
D) be equal only if the inflation rate is the same in each country.

Question

Quizplus · Accepted Answer

If capital flows freely internationally, the expected returns of two different countries with identical bonds will be equalized through arbitrage by investors seeking higher returns. This means that investors will buy bonds with higher expected returns and sell bonds with lower expected returns, which will drive the expected returns towards equality.

If the Bonds of Two Different Countries Are Identical, Their