1. A Thai baht bond with a coupon of 9.5% is initially priced at its face value
ID: 2739496 • Letter: 1
Question
1. A Thai baht bond with a coupon of 9.5% is initially priced at its face value of Bt 1,000. At the end of one year, the bond is selling for Bt 1,050. If the initial spot rate was Bt 25 = $1, at what end- of-year exchange rate will the dollar return on the bond just equal 10%? a) Bt 1 = $0.0384 b) Bt 1 = $0.0416 c) Bt 1 = $0.0482 d) Bt 1 = $0.0324
What formula or calculations are used to calculate the above problem? Show work
2. Suppose an investor buys a share of British Petroleum at a price of £32 at the start of the year. During the year, the investor receives a dividend of £1.5. At the end of the year, the price of BP is £34. During the year, the exchange rate goes from £1 = $1.78 to £1 = $1.63. What was the investor's dollar return on BP?
What formula or calculations are used to calculate the above problem? Show work
Explanation / Answer
Question 2)
Investor's dollar return = (Closing price - Opening Price) + Dividend / Opening Price * 100
Closing Price = 34 * 1.63 = $ 55.42
Opening Price = 32 * 1.78 = $ 56.96
Dividend = 1.5 * 1.63 = $ 2.445
Investor's dollar return = 55.42 - 56.96 + 2.445 / 56.96 * 100
= (-) 1.54 + 2.445 / 56.96 * 100
= 0.905 / 56.96 * 100
= 1.59 % (approx)
Conclusion:- Investor's dollar return = 1.59 % (approx).
Question 1) Closing Price = $ 1050 / A [ Let the Closing exchange rate be A]
Opening Price = 1000 / 25 = $ 40
Coupon amount = 1000 * 9.5 % = 95 Bt.
Coupon amount (In $ ) = $ 95 / A
Investor's dollar return = (Closing price - Opening Price) + Coupon amount / Opening Price
0. 10 = (1050 / A - 40) + 95 / A ] / 40
4 = 1050 - 40A + 95 / A
4 A = 1145 - 40 A
44 A = 1145
A = $ 26.0227
Thus, Closing Exchange rate = $ 26.0227. Accordingly 1 Bt = $ 1 / 26.0227, 1 Bt = $ 0.0384.
Conclusion:- Option a) Bt 1 = $ 0.0384
Summary:-
=
Question 1) a) Bt 1 = $0.0384 Question 2) 1.59 %Related Questions
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