Question

Complete b-e and show explanations

You are looking to purchase a $10,000 bond issued by Mexico in USD. It pays $500 annually and matures exactly 10 years from now.

A) What is Mexico’s current long term foreign currency credit rating by S&P? AA-

B) How much would you pay for this bond?

C) What rate did you use to make the calculation?

D) Why did you choose the rate?

Answer 1

(A) The S&P rating for Mexico's Long Term Foreign Currency Credit is 'AA- to A'. This foreign currency credit is in the form of long term (usually 10 year) Government Issued Bonds.

(B) Bond Par Value = $ 10000, Maturity = 10 Years, Coupon = $ 500

Current 10 Year Govt. Yield = 7.536% ("Data Quoted from Bloomberg's Live Bond Yield Tracker")

Therefore, Bond Market Price = P = 500 x (1/0.0753) x [1-{1/(1+0.07536)^(10)}] + 10000 / (1+0.07536)^(10)

P = $ 8262.13

(C) The interest or yield rate being used is the 10 Year Government Bond Yield for Mexico, as it is the safest, benchmark rated and most appropriate rate to use for quantifying the risk and pricing a country's external foreign currency debt. It is safe as Government backed bonds have low default risks, ratings for the same function as the benchmark for all bonds from that country and hence most appropriate to quantify and qualify a country's foreign debt.

(D) The 10 year Govt. Bond Yield was used because it is the worldwide accepted benchmark for qunatifying and pricing country foreign currency debts. It is also relatively safe and stable as it is backed and guaranteed by the Government and Government's usually have low default risks.