You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the German government bond will be hedged, and the six-month discount on Deutsche mark forward contracts is -0.75% versus the U.S. dollar.
$$\begin{array} { l c c c }
\text { Eond } & \text { Maturity } & \text { Coupon } & \text { Price } \
\hline \text { U.S. Gavernment } & \text { June 1,2013 } & 6.50 \% & 100.00 \
\text { German Government } & \text { June 1,2013 } & 7.50 \% & 100.00
\end{array}$$ You do not expect any price change in U.S. bond prices in the next six months. Calculate the expected price change required in the German government bond, which would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon.

Question

You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the German government bond will be hedged, and the six-month discount on Deutsche mark forward contracts is -0.75% versus the U.S. dollar.
 $$\begin{array} { l c c c } 
\text { Eond } & \text { Maturity } & \text { Coupon } & \text { Price } \
\hline \text { U.S. Gavernment } & \text { June 1,2013 } & 6.50 \% & 100.00 \
\text { German Government } & \text { June 1,2013 } & 7.50 \% & 100.00
\end{array}$$ You do not expect any price change in U.S. bond prices in the next six months. Calculate the expected price change required in the German government bond, which would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon.

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The Answer of You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the German government bond will be hedged, and the six-month discount on Deutsche mark forward contracts is -0.75% versus the U.S. dollar.
 $$\begin{array} { l c c c } 
\text { Eond } & \text { Maturity } & \text { Coupon } & \text { Price } \
\hline \text { U.S. Gavernment } & \text { June 1,2013 } & 6.50 \% & 100.00 \
\text { German Government } & \text { June 1,2013 } & 7.50 \% & 100.00
\end{array}$$ You do not expect any price change in U.S. bond prices in the next six months. Calculate the expected price change required in the German government bond, which would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon.

You Are a U You Do Not Expect Any Price Change in U