Question
Suppose you (US investor) purchase a 10-year AA-rated Swiss bond for par that is paying an annual coupon of 9%. The bond has a face
Suppose you (US investor) purchase a 10-year AA-rated Swiss bond for par that is paying an annual coupon of 9%. The bond has a face value of 1000 Swiss Fracs (SF). The spot rate at the time of purchase is SF1.15/$. At the end of the year, the bond is upgraded to AAA-bond and yield decreases to 7.5%. SF appreciates to SF1.30/$. What is the loss or gain to a US investor who holds this bond for a year? What portion (dollar value and percentage) is due to foreign exchange risk? What portion (dollar value and percentage) is due to interest rate risk?
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