Letticia Garcia an aggressive bond investor is currently thi

Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond. In particular, she\'s looking at a Swiss government bond that matures in 15 years and carries a 7.17% coupon. The bond has a par value of 8,000 Swiss francs (CHF) and is currently trading at 106.28 (i.e., at 106.28% of par). Letticia plans to hold the bond for a period of 1 year, at which time she thinks it will be trading at 110.45-she\'s anticipating a sharp decline in Swiss interest rates, which explains why she expects bond prices to move up. The current exchange rate is 1.59 CHF/U.S. $, but she expects that to fall to 1.21 CHF/U.S. $. Use the foreign investment total return formula to find the information below. a. Ignoring the currency effect, find the bond\'s total return (in its local currency). b. Now find the total return on this bond in U.S. dollars. Did currency exchange rates affect the return in any way? Do you think this bond would make a good investment? Explain. a. Ignoring the currency effect, the bond\'s total return (in its local currency) is %. (Round to two decimal places.)

Solution

Bonds total return in local currency - Swiss = Coupon + (Ending value - beginning value)

Beginning value

Coupon = 7.17%   

Beginning value = 106.28

Ending value = 110.45

= 7.17 + (110.45 - 106.28)

106.28

= 10.67%