Consider two bonds. One pays coupons of 50 CAD annually, has a face value of 1000 CAD, and matures in 8 years. Another pays coupons of 60 USD, has a face value of 1000 USD, and matures in 7 years.

1. If the yield in Canada is 4%, inflation is expected to be 1.5% annually for the next ten years, and inflation is expected to be 3% annually in the US for 10 years, determine the relative present values of the two bonds. That is, how large is the present value of the US Bond relative to Canadian bonds.
2. If the yield in the US is 3%, and inflation is expected to be 2.5% for the next 5 years, and 1% thereafter, while it is expected to be a steady 1.8% in Canada, determine the relative present values of the two bonds.

Answer rating: 100% (QA)

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