Suppose you purchase a 7-year AAA-rated Swiss bond for par that is paying an ann

Question

Suppose you purchase a 7-year AAA-rated Swiss bond for par that is paying an annual coupon of 7 percent and has a face value of 1,300 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.

A. 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)). Answer is a %.

B. 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)). Answer is a %.

Explanation / Answer

A When Bond Holder is Swiss Investor Bond Face Value    1,300.00 Annual Coupon rate 7% Interest at year end 1300*7% 91 Now yield become 9% Market Value of Bond=91/9%    1,011.11 Loss (1300.00-1011.11)       288.89 Loss in Percentage=288.89/1300 22.22% B When Bond Holder is US Investor SF1 Rate USD Bond Face Value    1,300.00 0.66667      866.67 1300*.66667 Annual Coupon rate 7% Interest at year end 1300*7% 91 Now yield become 9% Market Value of Bond=91/9%    1,011.11 0.74074      748.97 1011.11/.74074 Loss (866.67-748.97)      117.70 Loss in Percentage=117.7/866.67 13.58%

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