Question

Suppose a bond issued by the European Central Bank and denominated in euros pays 44​% per year. Today the exchange rate is 1.521.52 dollars per euro. It is expected that the exchange rate in one year will be 1.671.67 dollars per euro. What is the annual dollar return on this​ bond? A. negative 5−5 percent B. 1919 percent C. 44 percent D. 1414 percent

Answer 1

D. 14 percent

Step-by-step explanation:

The computation of the annual dollar return is shown below:

But before that we need to do following calculation

Let us assume the par value be $100

So, the bond par value is

= $100 × $1.52

= $152

The interest rate is

= $100 × 4%

= 4 euros

Future interest rate in dollars is

= 4 euros × 1.67

= $6.68

Now par value in the future is

= $100 × 1.67

= $167

Now the annual dollar return on this bond is

= (Future par value + Future interest rate in dollars - bond par value) ÷ (bond par value)

= ($167 + $6.68 - $152) ÷ ($152)

= 14.26%

hence, the correct option is d.