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% in the U.S. and 2% in Japan per year for the next five years. The appropriate discount rate for a bond of this risk would be 10% 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