You are a U.S. investor considering purchase of one of the following securities.

Assume that the currency risk of the Canadian government bond will be hedged, and the six-month discount on Canadian dollar forward contracts is .75% versus the U.S. dollar.

Bond Maturity Coupon Price U.S. government 6 months 6.50% 100.00 Canadian government 6 months 7.50% 100.00 Calculate the expected price change required in the Canadian government bond that would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon. Assume that the yield on the U.S. bond is expected to remain unchanged.

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