Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an an

ID: 2699938 • Letter: S

Question

Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an annual coupon of 7 percent and has a face value of 2,000 Swiss francs (SF). The spot rate is U.S. $0.66667 for SF1. At the end of the year, the bond is downgraded to AA and the yield increases to 9 percent. In addition, the SF depreciates to U.S. $0.74074 for SF1.

What is the loss or gain to a Swiss investor who holds this bond for a year? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

What is the loss or gain to a U.S. investor who holds this bond for a year? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

a. What is the loss or gain to a Swiss investor who holds this bond for a year? Purchase price = 1,000 SF Current value = PV of maturity + PV of Coupon payments Current Value = 1000/(1+10%)^9 + 80(1-(1+10%)^-9)/10% Current Value = 424.10 + 460.72 Current Value = 884.82 SF Loss = Purchase price - Current value = 115.18 SF b. What is the loss or gain to a U.S. investor who holds this bond for a year? Purchase price = 1,000 SF X 0.66667 = $ 666.67 Current value = PV of maturity + PV of Coupon payments Current Value = 1000/(1+10%)^9 + 80(1-(1+10%)^-9)/10% Current Value = 424.10 + 460.72 Current Value = 884.82 SF X 0.74074 = $ 655.42 Loss = Purchase price - Current value = $ 11.25

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Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an an

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Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an an

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