Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an an
ID: 2767657 • Letter: S
Question
Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an annual coupon of 9 percent and has a face value of 1,700 Swiss francs (SF). The spot rate is U.S. $0.66667 for SF1. At the end of the year, the bond is downgraded to AA and the yield increases to 11 percent. In addition, the SF depreciates to U.S. $0.74074 for SF1. a. What is the loss or gain to a Swiss investor who holds this bond for a year? b. What is the loss or gain to a U.S. investor who holds this bond for a year?Explanation / Answer
a. What is the loss or gain to a Swiss investor who holds this bond for a year?
Purchase price = 1,700 SF
Current value = PV of maturity + PV of Coupon payments
Current Value = 1700/(1+11%)^9 + 153(1-(1+11%)^-9)/11%
Current Value = 664.57 + 847.17
Current Value = 1511.74 SF
Loss = Purchase price - Current value
1511.71-1700
=188.26 SF
b. What is the loss or gain to a U.S. investor who holds this bond for a year?
Purchase price = 1700 SF X 0.66667 = $ 1133.339
Current value = PV of maturity + PV of Coupon payments
Current Value = 1700/(1+11%)^9 + 153(1-(1+11%)^-9)/11%
Current Value = 664.57 + 847.17
Current Value = 1511.74 SF
Current Value = 1511.74 SF X 0.74074 = $ 1119.81
Loss = Purchase price - Current value = $ 13.53
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