A five-year, 4 percent euro denominated bond sells at par. A comparable risk five-year, 5.5 percent euro/dollar dual-currency bond pays $1,500 at maturity per €1,000 of face value. It sells for €1,250. What is the implied $/€ exchange rate at maturity?

Question

Quizplus · Accepted Answer

The implied $/€ exchange rate at maturity is the present value of the dollar payment divided by the present value of the euro payment. The present value of the dollar payment is $1,500 / (1 + 0.055)^5 = €1,123.20. The present value of the euro payment is €1,250 / (1 + 0.04)^5 = €1,000. Therefore, the implied $/€ exchange rate at maturity is €1,123.20 / €1,000 = $1.1232/€.

A Five-Year, 4 Percent Euro Denominated Bond Sells at Par