Suppose you purchase a 9-year AAA-rated Swiss bond for par that is paying an ann

Question

Suppose you purchase a 9-year AAA-rated Swiss bond for par that is paying an annual coupon of 7 percent and has a face value of 2,900 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))

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))

Explanation / Answer

Rate 7% 9% Face Value 2900 Loss to Swiss Investor Face Value Interest Total Discount Factor Value at end 2900 203 3103 0.934579439                2,900 2900 203 3103 0.917431193                2,847 Loss                    -53 Loss or Gain to US investor Rate 7% 9% Face Value 2900 Spot Rate 0.66667 0.74074 Loss to Swiss Investor Face Value Interest Total Discount Factor Value at end 2900 203 3103 0.917431193                2,847 Moneny invested in USD 2900*.66667 1,933.34 Interest at begning rate 203*.66667      135.33 Money at the end of the year 2847*.74074 2,108.89 Gain to US investor         40.21

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