Lenora is based in Japan and she would like to invest in an Australian corporation to diversify her portfolio. Currently the Australian corporation is issuing two bonds in the Japanese market:

• Bond ABC denominated in JPY
• Bond XYZ denominated in AUD

1. Please describe the types of Bonds ABC and XYZ.

[2 Marks]

2. Lenora finds that the JPY/AUD exchange rate has been quite volatile over the past six months. Lara is primarily concerned about exchange rate volatility. Which bond is best for her and please explain your answer.

[3 marks]

3. Serena decides to sell her bond at the end of her investment horizon (before the maturity of the bond). Based on the What-if analysis results presented in the table below, you find that Serena will receive $171 no matter what interest rate will be in the market. If the bond has a Macaulay duration of 7 years, is Serenas investment horizon longer than the 7 years, less than 7 years, or equal to 7 years?

Over her investment horizon, does coupon reinvestment risk matter more to Serena, or market price risk matters more, or almost no interest rate risk to Serena? Please explain your answers.

[5 Marks]

Interest rate or Yield to Maturity	Future value of reinvested coupon payments plus sale price of bond at the end of the investment horizon (i.e. when bond is sold)
7%	$171.10
12%	$171.86
13%	$171.43