A Canadian mutual fund buys today newly issued 1,000 euro - £ floating rate notes, FRNs, at the par value of £ 10,000 per FRN. The term-to-maturity of each FRN is 4 years. The annual coupon rate, C, of the FRNs is set as: C = Beginning of the period LIBOR + .015 The interest rate reset period is one year. The currently prevailing LIBOR is 2.5% per annum. The current spot exchange rate between C$ and £ is: C $1.8 per £ and the expected spot exchange rate after 6 months is: C $1.85 per £. After 6 months the expected price per FRN is £ 10,100. Suppose that the Canadian mutual fund is planning to sell 1,000 FRNs after 6 months. 

Answer the following questions: 

(i) Calculate the expected rate of return the Canadian mutual fund will earn over 6 months. 

(ii) Find the expected coupon yield of the Canadian mutual fund’s investment in FRNs. 

(iii) Find the expected capital gains yield of the Canadian mutual fund’s investment in FRNs.

Answer rating: 100% (QA)

Cost of 1000 euro floating notes 100001000 10000000 Investment in C at the ... View the full answer