Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. Assume you just paid $1,202 for a convertible bond that carries a(n)10.25% coupon and has 15years to maturity. The bond can be converted into

1. Assume you just paid $1,202 for a convertible bond that carries a(n)10.25% coupon and has 15years to maturity. The bond can be converted into 24 shares of stock, which are now trading at $50 a share. Find the bond investment value of this issue, given that comparable nonconvertible bonds are currently selling to yield 13.09%.

The bond investment value of this issue is $___ (Round to the nearest cent.)

2.

Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond. In particular, she's looking at a Swiss government bond that matures in 15 years and carries a coupon of 8.62%. The bond has a par value of 9,000 Swiss francs (CHF) and is currently trading at 106.22(i.e., at 106.22% of par).

Letticia plans to hold the bond for a period of 1 year, at which time she thinks it will be trading at 111.03she's anticipating a sharp decline in Swiss interest rates, which explains why she expects bond prices to move up. The current exchange rate is 1.55 CHF/U.S.$, but she expects that to fall to 1.26 CHF/U.S.$. Use the foreign investment total return formula to find the following information.

a. Ignoring the currency effect, find the bond's total return (in its local currency).

b. Now find the total return on this bond in U.S. dollars. Did currency exchange rates affect the return in any way? Do you think this bond would make a good investment?

A.The better return is in U.S. dollars. Exchange rates yielded a higher total return because the dollar depreciated relative to the Swiss franc. The bond would make a good investment if the investor's required rate of return is at least equal to the bond's total return.

B.The better return is in the local currency. Exchange rates yielded a lower total return because the dollar depreciated relative to the Swiss franc. The bond would make a good investment if the investor's required rate of return is at least equal to the bond's total return.

C.The better return is in U.S. dollars. Exchange rates yielded a lower total return because the dollar depreciated relative to the Swiss franc. The bond would make a good investment if the investor's required rate of return is at least equal to the bond's total return

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing Principles Practice And Problems

Authors: Jagdish Prakash

1st Edition

9327244745, 978-9327244748

More Books

Students also viewed these Accounting questions

Question

How can we get to where we want to be?

Answered: 1 week ago

Question

Develop clear policy statements.

Answered: 1 week ago

Question

Draft a business plan.

Answered: 1 week ago

Question

Describe the guidelines for appropriate use of the direct plan.

Answered: 1 week ago