Suppose you purchase a 8-year AAA-rated Swiss bond for par that is paying an ann

Question

Suppose you purchase a 8-year AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent and has a face value of 1,800 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 8 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))

Suppose you purchase a 8-year AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent and has a face value of 1,800 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 8 percent. In addition, the SF depreciates to U.S. $0.74074 for SF1.

Explanation / Answer

a. Current price of the bond is calculated by using Present Value formula :

Current Price = PV of Face Value + Present Value of the Coupon Payment

Coupon Interest = 1800 * 6% = 180 SF

= 1800 / [( 1+8%) ^ 7] + 108 ( (1-(1+8%)^-7)/8%

= 1050.28 +562.28

=SF 1612.57

Loss on the Bond = Purchase price - Current Price

= 1800 - 1612. 57

= SF 187.429

Loss % to Swiss Investor = (187.429 /1800) *100

= 10.41 %

b. Current Value in Dollars = SF 1612.57 * $0.74074 = $1194.495

Purchase price in Dollars = SF 1800 * $0.66667 = $ 1200.006

Loss on the bond for a US Investor = $ 1200.006- $1194.495 = $ 5.51

Loss % = $ 5.51 / 1200.006 = 0.46 %

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