Question

Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond. In particular, she’s looking at a Swiss government bond that matures in 15 years and carries a 91/2% coupon. The bond has a par value of 10,000 Swiss francs (CHF) and is currently trading at 110 (i.e., at 110% of par). Letticia plans to hold the bond for 1 year, at which time she thinks it will be trading at 1171/2—she’s anticipating a sharp decline in Swiss interest rates, which explains why she expects bond prices to move up. The current exchange rate is 1.58 CHF/U.S.$, but she expects that to fall to 1.25 CHF/U.S.$. Use the foreign investment total return formula (Equation 10.3) to find the following information.
a. Ignoring the currency effect, find the bond’s total return (in its local currency).
b. Now find the total return on this bond in U.S. dollars. Did currency exchange rates affect the return in any way? Do you think this bond would make a good investment?
Explain.


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  • CreatedApril 28, 2015
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