A Thai baht bond with a coupon of is initially priced at its face value of Bt 1,000. At the end of one year, the bond is selling for Bt 1,050. If the initial spot rate was Bt 25 = $1, at what end- of-year exchange rate will the dollar return on the bond just equal 10%?

Question

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The dollar return on the bond is the coupon payment of Bt 50 plus the capital gain of Bt 50, for a total of Bt 100. To get a 10% return, the dollar value of this return must be $10. Since the initial spot rate was Bt 25 = $1, the end-of-year exchange rate must be Bt 1 = $0.04.

A Thai Baht Bond with a Coupon of Is Initially