Question

Suppose you purchase a 9-year AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent and has a face value of 1,400 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 8 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? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) loss to Swiss investor %?

b. What is the loss or gain to a U.S. investor who holds this bond for a year? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) gain to U.S. investor %?

Answer 1

Cost for Swiss investor		1400Sf
Bond value after degrading is the present value of future cashflows
in Swss franc
1 year lapsed, so remaining period is 8 years the and the yeild increased to 8%, so discount rate will be 8%
year	cash flow	discount factor@8%	Present value
1	84.00	0.9259259259259260	77.77777777777780
2	84.00	0.8573388203017830	72.01646090534980
3	84.00	0.7938322410201690	66.68190824569420
4	84.00	0.7350298527964530	61.74250763490210
5	84.00	0.6805831970337530	57.16898855083520
6	84.00	0.6301696268831050	52.93424865818080
7	84.00	0.5834903952621340	49.01319320201920
8	1484.00	0.5402688845019760	801.75902460093200
		Value of bond in Sf	1239.09410957569000
			1239.09411
Profit = (coupon + sale value - purchase value) / purchase value
profit for Swiss investor = (84 + 1239.09410957569 - 1400) / 1400 =			-0.0549327788745071
		profit = -5.49327788745071%
rounded to 2 decimal places =		-5.49%
which means loss of 5.49%
	Cast of US investor = 1400 X 0.66667		$933.33800
sale value for investor = 1239.09410957569 X $0.74074			$917.84657072709700
Profit = (coupon + sale value - purchase value) / purchase value
		Coupon = 84 X $0.74074	$62.22216000000000
profit=($62.22216+$917.846570727097-$933.338000)/$933.338000			0.0500683897228
profit = 0.0500683897227982 or 500683897227982%
profit Rounded to 2 decimal points		5.01%

Please rate the answer maximum if you get the answer and satisfied. If you remains any doubts on this answer, please leave a comment and it will be cleared.

thank you.....