Suppose you purchase a 10-year, AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent. The bond has a face value of 1,000 Swiss francs

(SF). The spot rate at the time of purchase is SF1.15/$. At the end of the year, the bond is downgraded to AA and the yield increases to 8 percent. In addition, the SF appreciates to SF1.05/$.

a. What is the loss or gain to a Swiss investor who holds this bond for a year?

What portion of this loss or gain is due to foreign exchange risk? What portion is due to interest rate risk?

b. What is the loss or gain to a U.S. investor who holds this bond for a year?

What portion of this loss or gain is due to foreign exchange risk? What portion is due to interest rate risk?