A Brazilian bond with a coupon rate of 20% is initially priced at its face value of R$1,000.At the end of the year,the bond is selling at R$1,050.If the real depreciates by 75%,what is the dollar return at the end of the year?

Question

Quizplus · Accepted Answer

The coupon payment is R$200 (20% of R$1,000) per year. The capital gain is R$50 (R$1,050 - R$1,000). The total return in Brazilian real is R$250 (R$200 + R$50). Since the real depreciates by 75%, the dollar return is:
($250/R$1) / (1 - 75%) - ($1,000/R$1) = $1.00 / 0.25 - $1,000 
= $4 - $1,000 
= -$996 
So the dollar return is -996/1,000 = -0.996 or -68.75% (since the initial investment was R$1,000, the dollar return is calculated as a percentage of that amount).

A Brazilian Bond with a Coupon Rate of 20% Is