1. A U.S. investor has $20,000. This is used to buy a stock in Sweden that costs
ID: 2803634 • Letter: 1
Question
1.
A U.S. investor has $20,000. This is used to buy a stock in Sweden that costs 100 Swedish krona per share. At this time the exchange rate is $0.11 = 1 Swedish krona.
One year later the stock can be sold for 105 Swedish krona per share. The investor sells the stock and converts the krona back to dollars. If the return to the U.S. investor (measured in dollars) was -14.1%, what was the exchange rate
A. $0.09 = 1 Swedish krona
B. $0.12 = 1 Swedish krona
$0.06 = 1 Swedish krona
$0.14 = 1 Swedish krona
2.
A bond just paid its $80 annual coupon. The bond matures in 10 years. The par value of the bond is $1,000. If the yield to maturity of the bond is 7%, the bond value today must be _____.
A. $561.89
B. $508.35
C. $1,070.24
D. $1,561.89
3.
A bond just paid its annual coupon of $75. It has a $1,000 par value, and will mature in 9 years.
TRUE or FALSE: If the yield to maturity of this bond is 6.2%, the bond will have a market value less than $1,000.
True
False
4.
Bond A has a duration of 8.2 years and a yield to maturity of 8%.
Bond B has a duration of 6.6 years and a yield to maturity of 10%.
The yield to maturity of both bonds increases by .3 percentage points (to 8.3% for A and 10.3% for B).
TRUE or FALSE: Bond A will have the larger percentage decrease in its price.
True
False
5.
Suppose that the exchange rate between the U.S. dollar and the Canadian dollar one year ago was $0.70 = 1 Canadian dollar. Today (so one year later) the exchange rate is $0.73 = 1 Canadian dollar.
TRUE or FALSE: The U.S. dollar depreciated against the Canadian dollar between one year ago and today.
True
False
6.
The ZZZ Corporation has bonds that pay an annual coupon of $75. The par value of the bonds is $1,000. The current market price of the bonds is $900.
TRUE or FALSE: The yield to maturity of these bonds is greater than 7.5%.
True
False
A. $0.09 = 1 Swedish krona
B. $0.12 = 1 Swedish krona
C.$0.06 = 1 Swedish krona
D.$0.14 = 1 Swedish krona
Explanation / Answer
1) Statement showing calculation of proceeds from sales of shares
Now lets calculate amuont received in USD
Retrun is-14.1% means wealth have decreased by that amount
USD received after one year = 20000(1-0.141)
=20000(0.859)
=17180$
Thus exchange rate = 190909.09 Swedish krona = 17180$
1 Swedish krona = 0.09$
Ans ) a
2)
Value of bond = Interest*PVIFA(r%,n ) + redemption value*PVIF(r%,n)
=80*PVIFA(7%,10) + 1000*PVIF(7%,10)
=80*7.024 + 1000*0.5083
=561.887+508.3
=1070.24
Thus ans C)
3) coupen rate of bond = 75/1000 = 7.5%
Yield to maturity is 6.2%
Since bond yield more than market return it will have higher value than 1000$
Check : Value of bond =
Value of bond = Interest*PVIFA(r%,n ) + redemption value*PVIF(r%,n)
=75*PVIFA(6.2%,10) + 1000*PVIF(6.2%,10)
=75*6.7429 + 1000*0.5819
=505.71+581.9
=1087.62$
thus statement false
4) Higher the bond duration more it is sensitive to change in interest rate
thusBond A's price will fall more than bond B's price
Thus statement is True
5) Spot 1 CAD = $0.70
one year latter 1 CAD = $0.73
Thus to buy 1 unit of $ more unit of CAD will be required thus CAD has depreciated and $ has appreciated
thus statement is flase
6) Statement is true, since the market price is less than face value
Particulars Amount in Swedish krona Coversion of US dollar into Swedish krona(20000$/0.11$) 181818.18 No of shares to be purchased
=181818.18/100 1818.18 Total sales proceeds(1818.18*105) 190909.09
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