Suppose you purchase a 10-year, AAA-rated Swiss bond for par that is paying an annual coupon of
Question:
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?
CouponA coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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a Beginning of the Year End of the Year The loss to the Swiss i...View the full answer
Financial Institutions Management A Risk Management Approach
ISBN: 978-1259717772
9th edition
Authors: Anthony Saunders, Marcia Millon Cornett
