Assignment $5\mathrm{.}4$ Exercises

Problem $4$: Calculating Dollar Returns with Exchange Rates $5$ Points

An American investor purchases a single Eurobond from their personal financial advisor. The bond is denominated in Euros, but the investor uses their American dollars to make the purchase. The bond sells for $1023$ euros, and has a par value of $1000$ euros. At the time of purchase, the exchange rate is $$1$ US Dollar per $1\mathrm{.}24$ Euros. The coupon rate on the bond is $8\%,$ paid annually. One year later, the coupon is paid and the investor sells the bond for $918$ euros. The exchange rate at the time of sale has fallen to $$1$ US Dollar per $1\mathrm{.}10$ Euros.

a$)$ What was the purchase price in US Dollars?

b$)$ How much money did the investor earn from coupon interest, in dollars? How much did they lose due to the decline in the bond's price? How much did they gain from the change in the exchange rate?

c$)$ What was the bond's selling price, in US Dollars?

d$)$ What was the investor's total earnings during the year, in US Dollars?

e$)$ The bond fell in value dramatically during the year. Its price fell by over $10\%$ in Euros! Nevertheless, the investor sold the bond for more money, in US Dollars, than they bought it for, and earned a substantial return. How is this possible? Explain.

Use the Template Provided Below to Create Your Solution $-$ Pay close attention to the formulas and formatting of the inputs, and be sure to answer all parts of the question.