1. Suppose you purchase a 15-year, AAA-rated Swiss bond for par that is paying an annual coupon of 7.5%. The bond has a face value of 1,000 Swiss francs (SF). The spot rate at the time of purchase is SF1.10/$. At the end of the year, the bond is downgraded to AA and the yield increases to 8.5%. In addition, the SF appreciates to SF1.025/$.

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? (3 points)

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? (3 points)