Answer to Question #99151 in Macroeconomics for Ritwick Gautam

Question

4. “According to Ibbotson Associates, 20 – year government bonds are on track to post annual returns of 30% by the end of 1995. That would lag only the 40% returns of 1982 and 31% returns of 1985”

In 1995 the interest rate was far below 30%. How could 1995 returns on bonds be as high as 30%?

Answer 1

there was a large compensation for risk

The following factors apply:

1) the higher the risk, the greater the return

2) the state funds invested money in production and, due to the effect of the government procurement multiplier, provides increased profitability