A zero-coupon French bond promises to pay €100,000 in five years.The current exchange rate is $1.50 = €1.00 and inflation is forecast at 3 percent in the U.S.and 2 percent in the euro zone per year for the next five years.The appropriate discount rate for a bond of this risk would be 10 percent if it paid in dollars.What is the appropriate price of the bond?

Question

Quizplus · Accepted Answer

The correct answer is A because the appropriate price of the bond is £65,196.13 = $97,794.20. This is because the bond is a zero-coupon bond, which means that it does not pay any interest payments. The only payment that the bondholder will receive is the face value of the bond at maturity. The present value of the bond is the amount of money that the bondholder would need to invest today in order to receive the face value of the bond at maturity. The present value of the bond is calculated using the following formula:PV = FV / (1 + r)^nwhere:PV is the present value of the bondFV is the face value of the bondr is the discount raten is the number of years to maturityIn this case, the face value of the bond is €100,000, the discount rate is 10%, and the number of years to maturity is 5. Plugging these values into the formula, we get:PV = €100,000 / (1 + 0.10)^5PV = €65,196.13Converting this to dollars using the current exchange rate, we get:PV = €65,196.13 * $1.50 / €1.00PV = $97,794.20

A Zero-Coupon French Bond Promises to Pay €100,000 in Five