Bond Value Sensitivity to Exchange Rates and Interest Rates Cardinal Company, a U.S.-based 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:

YEAR	EXCHANGE RATE OF C$	YEAR	EXCHANGE RATE OF C$
1	$0.80	4	$0.72
2	0.77	5	0.68
3	0.74	6	0.66

o a. Refer to earlier examples in this chapter to determine the expected U.S. dollar cash flows to Cardinal over the next four years. Determine the present value of a bond.

o b. Does Cardinal expect to be favorably or adversely affected by the interest rate risk? Explain.

o c. Does Cardinal expect to be favorably or adversely affected by exchange rate risk? Explain.