Find the value today of a 2-year dual currency bond with annual coupons (paid in U.S.dollars at a 5 percent coupon rate)that pays £500 per $1,000 par value at maturity.The cash flows of the bond are: The dollar-based yield to maturity is i_$ = 3%; the spot exchange rate is $1.80 = £1.00; expected inflation over the next three years is $\pi$_$ = 2% in the U.S.and $\pi$_£ = 3% in the U.K.

Question

Quizplus · Accepted Answer

Step 1: Calculate the present value of cash flows in U.S. dollars.

PV of coupons = $50/1.03 + $50/1.03^2 = $96.12
PV of principal repayment = $500/1.03^2 = $457.50
Total PV in dollars = $96.12 + $457.50 = $553.62

Step 2: Convert the PV to pounds using the spot exchange rate.

PV in pounds = $553.62/1.80 = £307.57

Step 3: Adjust for inflation in both countries to get the real value in today's dollars.

Real PV in dollars = £307.57*(1+0.03)^2 / (1+0.02)^3 = $927.62

Therefore, the best choice is A) $927.62.

Find the Value Today of a 2-Year Dual Currency Bond π\piπ

Find the Value Today of a 2-Year Dual Currency Bond $\pi$