NEW YORK (Dow Jones)--Saturday's death of North Korean leader Kim Jong Il has given a lift to that country's only openly traded securities, a batch of bonds that haven't received a payment in almost three decades.

The defaulted bonds, which were created in 1997 when French bank BNP repackaged a series of non-performing syndicated bank loans that were granted to North Korea in the seventies, have suddenly sparked interest among speculators. The sporadically traded bonds, which trade at a deep discount to their face value, saw a tick up this week and were recently quoted at between 14 and 18 cents on the dollar, compared with 13 to 15 cents, according to London-based sales and brokerage house Exotix.

Those who have bought the bonds are making nothing less than a bet that the transfer of power to Kim's son Kim Jong Eun will usher in a moment akin to that of the Berlin Wall's collapse for the tightly controlled communist country.

"Investors are looking at this as an unlimited option trade with enormous potential gains," said Andrew Chappell, head of European, African and Middle Eastern fixed income trading and sales at brokerage house Exotix in London, who says that inquiries into the bonds have increased in recent days.

According to Chappell's calculations, investors' claims extend to the principal and interest accrued from 1984 when the original loans defaulted. That amounts to anywhere between 300% to 600% in unpaid interest.

The premise that's attracted hedge funds and pension funds is that North Korea can't exist in isolation forever, and like other former communist countries will find a need to tap the international markets for funds.

That's why the death of Kim Jong Il has opened a rare opportunity that bets on these bond could pay off. Although there's no indication of what the structure of the government will look like under Kim Jong Eun, or of the direction it will take, some observers expect the U.S. and other western powers to use this opportunity to bring North Korea into the international fold.

By all accounts, North Korea is in very poor shape financially. A significant segment of the population is said to be dying of starvation. The country's economy pulls in a meager $29 billion in annual gross domestic product, compared with $1.117 trillion in South Korea, according to IHS Global Insight estimates for 2011. That gaping shortfall in material well-being, the optimists reckon, will eventually drive North Korea to make good with the international community and seek foreign investment. But first it will have to clear its unpaid debts.

In fact, it was a similarly desperate need for funds that initially drove North Korea to borrow a total of 680 million Deutsche Marks and 455 million Swiss francs in syndicated loans from nearly 100 foreign banks in the late 1970s. By 1984, the country had defaulted on these loans and they were left dormant for more than a decade. But in the late 1990s, some of the banks wanted to capitalize on hopes at that time for a reunification between North Korea and South Korea, so they parceled some of the nonperforming loans into two tranches of DEM293 million and CHF217 million.

BNP, now called BNP Paribas, was the manager on the deal. It created a special purpose vehicle called NK Debt Corp., incorporated in the British Virgin Islands, to hold the loans and then sold rights to them to investors.

Over the years, even as North Korea has again distanced itself from the international community and toyed with nuclear ambitions, interest in the zero-coupon no-income bond has waxed and waned among a select few buyers interested in frontier markets or risky bets. As if passing the hot potato, fund managers have been buying and holding these bonds for a few years and then exchanging them for something else, Chappell said.

The holdings are now concentrated among a dozen or so blue-chip pension fund managers and hedge funds, he said, but declined to name them.

Franklin Templeton Emerging Market Debt Opportunities Fund, which is allowed to invest in defaulted debt, confirmed that it holds about $4.25 million in nominal value of the Deutsche mark-denominated bonds. It declined to comment further.

"These investors are not saying the bond has to pay off to make money," said Tim Slaughter, head of fixed income at Auerbach Grayson, an agency brokerage in New York. "For them, if the price goes up from 14 cents to 16 cents it's a good return on a $5 million investment. Investors are not necessarily looking for North Korea to reconcile with South Korea."

But others say this speculative game is simply not worth the risk.

"The price on North Korean debt is too high in the sense there are so many alternatives in frontier debt that are actually paying coupons and redemptions that are trading at attractive levels," said Morten Bugge, chief investment officer at Global Evolution A/S, a Denmark-based hedge fund that had held these North Korean bonds in the early years.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com