A Euro bond with a coupon rate of 10% is initially priced at its face value of €1000.At the end of the year,the bond is selling at €1,070.If the € appreciates by 12% during the year,what is the end- of-year dollar return on the bond?

Question

Quizplus · Accepted Answer

The annual coupon payment = 10% * €1000 = €100
The capital gain due to increase in price = €1070 - €1000 = €70

Total return in Euros = Annual coupon payment + Capital gain/Initial price  * 100%
= €100 + (€70/€1000) * 100%
= €100 + 7%
= €107

The Euro appreciates by 12% during the year, which means that the exchange rate at the end of the year is $1.12 for every €1.

So, in dollars, the end-of-year value of the bond = €1070 * $1.12 = $1200.40

The initial price of the bond in dollars = €1000 * $1.00 = $1000.00

Therefore, the dollar return on the bond = (End-of-year value - Initial value)/Initial value * 100%
= ($1200.40 - $1000)/$1000 * 100%
= 20.04%

So, the end-of-year dollar return on the bond is 20.04%, which is closest to option C (31.04%). None of the answer choices are correct.

A Euro Bond with a Coupon Rate of 10% Is