A Canadian bond is initially priced at its face value of C$1,000.At the end of the year,the bond is selling for C$1,100.If the Canadian dollar appreciates by 10%,with a 5.5% coupon,what will the U.S.dollar return on the bond equal at the end of the year?

Question

Quizplus · Accepted Answer

The initial price of the bond is C$1,000, and the coupon rate is 5.5%, therefore the annual coupon payment is C$1,000 x 5.5% = C$55.

At the end of the year, the bond is selling for C$1,100, which means that there is a capital gain of C$100.

The U.S. dollar return on the bond will depend on the exchange rate at the end of the year. If the Canadian dollar appreciates by 10%, then the exchange rate will be 1.1 CAD/USD.

The total return in Canadian dollars will be C$55 (coupon payment) + C$100 (capital gain) = C$155.

To convert this to U.S. dollars, we need to multiply by the exchange rate:

C$155 x 1.1 CAD/USD = US$170.5

The percentage return in U.S. dollars is:

(US$170.5 - US$1,000)/US$1,000 x 100% = 17.05%

Therefore, the nearest choice is B) 27.1% (which is not the exact answer, but the nearest one)

A Canadian Bond Is Initially Priced at Its Face Value