You bought a yendenominated corporate bond at the beginning

You bought a yen-denominated corporate bond at the beginning of the year for ×100,000. The bond paid 3 percent annual interest and was trading for ×110,000 at year-end. The exchange rate was $1 = ×100 at the beginning of the year and $1 = ×97 at year-end. What would be your U.S. dollar holding return on the bond?

3.09%

6.09%

13%

16.49%

30%

None of the above.

Solution

Interest = 100000 * .03 = 3000 Yen - Convert to US dollars - 3000/97 = 30.92

Initial yen bond value - 100000 - Convert to US dollars - 100000/100 = 1000

Final yen bond value - 110000 - Convert to US dollars - 110000/97 = 1134.02

Holding period return in US$= Income + (Ending valie of bond - beginning value of bond) / beginning value of bond

All computations in US$

Holding period return in US$ = 30.92 + (1134.02 - 1000) / 1000

= 164.92/1000 = .16492 * 100 = 16.492%