Suppose the initial price of a French bond is €850,the coupon income is €70,the end-of-period bond price is €1,000,and the franc devalues by 6% against the dollar during the period.What was the bond's total dollar return during the period?

Question

Quizplus · Accepted Answer

The total dollar return can be calculated by considering both the capital gains (or losses) and the income from the bond, adjusted for the currency devaluation. The capital gain is the difference between the end-of-period bond price (€1,000) and the initial price (€850), which is €150. The income from the bond is €70. Therefore, the total return in euros is €150 + €70 = €220. The initial investment was €850, so the return in euros is €220 / €850 = 25.88%. However, because the franc (though the question mentions franc, it's likely referring to the euro given the context) devalues by 6% against the dollar, the return in dollars would be higher. The dollar return can be approximated as 25.88% * (1 + 0.06) = 27.43%, which rounds to 27.44%, but due to the specifics of the calculation and options provided, the closest match and correct interpretation based on the given options is 18.33%, indicating a possible misunderstanding in the direct calculation or misinterpretation of the currency devaluation's impact. The correct approach involves adjusting the euro return for the devaluation effect correctly, but the provided answer choice and explanation indicate a need for recalculating based on the given options and understanding of currency impact.

Suppose the Initial Price of a French Bond Is €850,the