A zero-coupon Japanese bond promises to pay ¥1,200,000 in five years.The current exchange rate is $1.00 = ¥100 and inflation is forecast at 3 percent in the U.S.and 2 percent in Japan 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 ¥782,353.60, which is equivalent to $7,823.54 at the current exchange rate. This is calculated by discounting the future value of the bond payment back to the present using the appropriate discount rate of 10% and taking into account the expected inflation rates in the U.S. and Japan.

A Zero-Coupon Japanese Bond Promises to Pay ¥1,200,000 in Five