A Canadian mutual fund buys today newly issued 1,000 euro - floating rate notes, FRNs, at the

par value of 10,000 per FRN. The term-to-maturity of each FRN is 4 years. The annual coupon

rate, C, of the FRNs is set as:

C = Beginning of the period LIBOR + .015

The interest rate reset period is one year. The currently prevailing LIBOR is 2.5% per annum.

The current spot exchange rate between C$ and is: C $1.8 per and the expected spot

exchange rate after 6 months is: C $1.85 per . After 6 months the expected price per FRN is

10,200.

Suppose that the Canadian mutual fund is planning to sell 1,000 FRNs after 6 months.

1. Calculate the expected rate of return the Canadian mutual fund will earn over 6 months.

2. Find the expected coupon yield of the Canadian mutual funds investment in FRNs.

3. Find the expected capital gains yield of the Canadian mutual funds investment in FRNs.