Question

Suppose a Chinese company buys a one-year TB with a face value of $10,000 today for...

Suppose a Chinese company buys a one-year TB with a face value of $10,000 today for $9,500. If the value of the dollar declined from 8 renminbi (yuan) to 7 renminbi during the year, what rate of return will the Chinese company earn on its investment?

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Answer #1

Face value of bond = 10000$

Purchase price of bond = 9500$

Old Exchange rate of USD/YUAN = 8

Current Exchange Rate of USD/YUAN = 7

Face value of bond in Old exchange rate = 10000 * 8 = 80000 Yuan

Purchase price in Old exchange rate = 9500 $ * 8 = 76000 Yuan

Value of bond at maturity in Current exchange rate = 10000 * 7 = 70000 Yuan

Rate of return on investment = value of bond in current exchange rate /Purchase price of bond in old exchange rate   – 1 * 100

(as the Chinese investor purchased the bond at discount price of 76000 exchange rate and to be redeemed at 80000 Yuan , but Yuan appreciated against the dollar and after one year, the value of bond that the investor will get on current exchange rate will be negative)

= 70000 / 76000 – 1 * 100

= - 7.89 %

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