Question asks for which is the better bond. The answer says we should compare excess returns. Why is excess returns on a bond = bond return – risk-free rate in the foreign country.
if it is a domestic bond -> it would be return on bond - risk free rate in domestic country
if it is a foreign bond - by the same token it would be return on bond - risk free rate in foreign country
it is against whatever you would be able to earn in that particular environment if you did not invest in the particular bond but went with treasury bonds in that country - which is the risk free rate in that country.