Suppose an investor buys a Japanese bond with a coupon rate of 10% at its price of ¥1,100.The bond's face value is ¥1,000.At the end of the year,the bond is selling at ¥1,050 and the ¥ has depreciated by 10%.What is the dollar return on the bond at the end of the year?

Question

Quizplus · Accepted Answer

To calculate the dollar return on the bond, we need to convert the yen values into dollars using the current exchange rate.

Initial investment = ¥1,100
Coupon payment at end of the year = ¥1,000 x 10% = ¥100

Total yen received at end of year = ¥1,100 + ¥100 = ¥1,200

New exchange rate (including depreciation) = 1/120 = 0.008333

Total dollar received at end of year = ¥1,200 x 0.008333 = $10

Dollar return = (Total dollar received - Initial investment) / Initial investment x 100%

Dollar return = ($10 - $11) / $11 x 100% = -9.09%

However, we also need to take into account the change in bond price from ¥1,100 to ¥1,050. Since the bond price has decreased, we need to subtract this amount from the dollar return.

New bond price (in yen) = ¥1,050 
New bond price (in dollars) = ¥1,050 x 0.008333 = $8.75

Total dollar return = (Total dollar received - Initial investment - Decrease in bond price) / Initial investment x 100%

Total dollar return = ($10 - $11 - $8.75) / $11 x 100% = -5.91%

Therefore, the answer is B) -5.91%.

Suppose an Investor Buys a Japanese Bond with a Coupon