Assume that Stephanie Wong, portfolio manager for Fourth Street Global Investors based in New York City, buys a 10-year, 4% coupon bond issued by the British Government for GBP 10,000,000. The bond is issued at par on April 4, 2018 when the spot rate is 1.40 USD/GBP. One year risk-free interest rates are 2% for USD and 4% for GBP and covered interest parity holds. Coupons on the bond are paid on an annual basis.

a.Suppose after one year, on April 4, 2019 long-term GBP interest rates have increased to 4.14% and Stephanie's bond is now worth only 9,900,000. The spot currency rate on April 4, 2019 is now 1.41 USD/GBP.

1)Calculate the return on Stephanie's bond in USD terms assuming she did not currency hedge the bond.

2)Calculate the return on Stephanie's bond in USD terms assuming she used a nave currency hedge, i.e. she assumed that GBP interest rates would not change.