You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000.The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end.The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end.What was your U.S.dollar holding period return on the bond?
A) 3%
B) 7%
C) 10%
D) 13%
E) 30%
F) None of the above.

Question

Quizplus · Accepted Answer

First, we need to calculate the total return in yen: 
Interest earned = ¥100,000 x 0.03 = ¥3,000 
Capital gain/loss = ¥110,000 - ¥100,000 = ¥10,000 
Total return = ¥3,000 + ¥10,000 = ¥13,000

Next, we convert the total return in yen to U.S. dollars using the exchange rates: 
Beginning exchange rate = $1/¥100 
Ending exchange rate = $1/¥122 
Total return in yen = ¥13,000 
Total return in dollars = ¥13,000/¥122 = $106.56

Finally, we calculate the holding period return as a percentage: 
Beginning investment in dollars = ¥100,000/$1/¥100 = $1,000 
Holding period return = ($106.56 - $1,000)/$1,000 = 10.66% 
Rounding to the nearest whole number, the holding period return is 13%.

You Bought a Yen-Denominated Corporate Bond at the Beginning of the Year