The Bank of Canada and the Swiss National Bank both issue treasury bonds to borrow money from investors to finance government expenditures. Treasury bonds pay interest to investors on a quarterly or annual basis until the bonds reach their maturity dates, at which point investors can redeem them. In contrast to the shorter time durations of bills and notes, bonds reach maturity after a decade or longer. Canada and Switzerland both issue 10-year and 30-year treasury bonds.
During difficult economic times, central banks may raise yields on bonds in excess of current rates to stimulate investments in their economies. Both Canada and Switzerland have provided excellent yields for investors who purchased bonds in the past, but current rates are lackluster. The Bank of Canada currently sets a 1 percent funds rate, while Switzerland has a central rate of 0 percent. As such, Switzerland offers a coupon rate of 3.5 percent a year, while Canada offers a coupon rate of 4.0 percent a year on 10-year treasury bonds as of October 2011.
Bid yield describes what investors are willing to pay for bonds on the open market. If investors have less faith in a government, bonds will sell at a discount to their coupon rates. Swiss 10-year treasury bonds offer a bid yield of 1.20 percent per year, while Canadian bonds offer a bid yield of 2.70 percent per year as of 2011.
When considering yields on bonds, investors should not neglect fluctuations in exchange rates. A currency that increases in value compared to the U.S. dollar (USD) will lead to higher investor profits. From January 2006 to October 2011, the Canadian dollar increased in value from roughly .85 on the dollar to a 1:1 ratio. The Swiss Franc increased in value from .80 to 1.15 USD over the same period.
Due to the long duration of treasury bonds, investors must consider the economic potential and liabilities of both Canada and Switzerland to maximize their returns. Both countries have advantages and shortfalls. Switzerland has maintained its’ status as a solid banking haven for more than a century, while Canada has vast natural resources. As part of the European Union, Switzerland is hurt by the financial troubles of other European nations. Canada remains independent from financial entanglements and boasts a fast growing economy.
Governments mired in debt may offer higher returns on Treasury bonds to attract investors, but large amounts of government debt can cause sluggish economic growth or even a default on bond obligations. Neither Canada nor Switzerland have ever defaulted on their obligations, but Canada has a debt totaling 84 percent of gross domestic product (GDP), while Switzerland maintains a much lower debt-to-GDP ratio of 38.7 percent as of 2010.
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