Problem 20-6 (LG 20-1)

Suppose you purchase a 9-year AAA-rated Swiss bond for par that is paying an annual coupon of 8 percent and has a face value of 1,200 Swiss francs (SF). The spot rate is U.S. $0.66667 for SF1. At the end of the year, the bond is downgraded to AA and the yield increases to 10 percent. In addition, the SF depreciates to U.S. $0.74074 for SF1. a. What is the loss or gain to a Swiss investor who holds this bond for a year? b. What is the loss or gain to a U.S. investor who holds this bond for a year?