214 Part 3: Debt Security Markets insurance company, considers purchasing bonds denominated in Canadian dollars, with a maturity of six years, a par value of C$50 million, and a coupon rate of 12 percent. Cardinal can purchase the bonds at par. The current exchange rate of the Canadian dollar is $0.80. Cardinal expects that the required return by Canadian investors on these bonds four years from now will be 9 percent. If Cardinal purchases the bonds, it will sell them in the Canadian secondary market four years from now. It forecasts the exchange rates as follows: EXCHANGE EXCHANGE RATE OF CS YEAR YEAR RATE OF CS 1 $0.80 4 $0.72 2 0.77 5 0.68 3 0.74 6 0.66 a. Refer to earlier examples in this chapter to deter- mine the expected U.S. dollar cash flows to Cardinal over the next four years. Determine the present value of a bond. b. Does Cardinal expect to be favorably or adversely affected by the interest rate risk? Explain. c. Does Cardinal expect to be favorably or adversely affected by exchange rate risk? Explain. 1 tw fix www S Hanl