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

Answer a) Purchase Price = 1800 SF

Current Value = PV of maturity + Pv of Coupon Payments

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

=1050.28 +562.29

Current Value = 1612.57 SF

Loss = Purchase Price - Current Value = 1800-1612.57 = 187.43 SF

b)

Purchase Price = 1800 SF X 0.66667 = $ 1200.006

Current Value = Pv of maturity + Pv of Coupon Payments

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

   =1050.28 +562.29

Current Value = 1612.57 SF x 0.74074 = $ 1194.50

Loss = Purchase Price - Current Value = $ 1200.006-1194.50 = $ 5.506

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