Lenora is based in Japan and she would like to invest in an Australian corporation to diversify her portfolio. Currently the Australian corporation is issuing two bonds in the Japanese market:

Bond ABC denominated in JPY

Bond XYZ denominated in AUD

A) Please describe the types of Bonds ABC and XYZ.

B) Lenora finds that the JPY/AUD exchange rate has been quite volatile over the past six months. Lenora is primarily concerned about exchange rate volatility. Which bond is best for her and please explain your answer.

C) A.Serena decides to sell her bond at the end of her investment horizon (before the maturity of the bond). Based on the What-if analysis results presented in the table below, you find that Serena will receive $171 no matter what interest rate will be in the market. If the bond has a Macaulay duration of 7 years, is Serena's investment horizon longer than the 7 years, less than 7 years, or equal to 7 years?

Over her investment horizon, does coupon reinvestment risk matter more to Serena, or market price risk matters more, or almost no interest rate risk to Serena? Please explain your answers.

Transcribed Image Text:

Interest rate or Future value of reinvested coupon payments plus sale price of Yield to Maturity bond at the end of the investment horizon (i.e. when bond is sold) 7% 12% 13% $171.10 $171.86 $171.43 Interest rate or Future value of reinvested coupon payments plus sale price of Yield to Maturity bond at the end of the investment horizon (i.e. when bond is sold) 7% 12% 13% $171.10 $171.86 $171.43

Answer rating: 100% (QA)

A Bond ABC is a form of JPYdenominated Samurai Bond issued by foreign companies to take advantage of ... View the full answer