Question
6. Factors affecting international bond prices Suppose you invested in a bond that has a par value of 2,666,666.6667 British pounds, a coupon rate of
6. Factors affecting international bond prices
Suppose you invested in a bond that has a par value of 2,666,666.6667 British pounds, a coupon rate of 5 percent (with payments being made at the end of each year), and four years until its maturity. Also suppose that the value of the pound is currently $1.50.
For each of the scenarios, calculate the forecasted cash flows for years 1, 2, 3, and 4. (Hint: Do not round intermediate calculations. Round your final answers to the nearest whole dollar value.)
| Scenario I (Stable Pound) | Year 1 | Year 2 | Year 3 | Year 4 |
|---|---|---|---|---|
| Forecasted value of the pound | $1.50 | $1.50 | $1.50 | $1.50 |
| Forecasted dollar cash flows |
|
|
|
|
| Scenario II (Weak Pound) | Year 1 | Year 2 | Year 3 | Year 4 |
|---|---|---|---|---|
| Forecasted value of the pound | $1.48 | $1.46 | $1.44 | $1.40 |
| Forecasted dollar cash flows |
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|
|
|
| Scenario III (Strong Pound) | Year 1 | Year 2 | Year 3 | Year 4 |
|---|---|---|---|---|
| Forecasted value of the pound | $1.52 | $1.55 | $1.58 | $1.61 |
| Forecasted dollar cash flows |
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|
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Based on your calculations, the least attractive foreign bonds are those that are denominated in a currency which over time.
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Public Finance A Contemporary Application Of Theory To Policy
Authors: David N. Hyman
5th Edition
0030113172, 978-0030113178
