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In 2005, Argentina in crisis issued an exchange-rate adjusted (to €) bond in its currency (call...

In 2005, Argentina in crisis issued an exchange-rate adjusted (to €) bond in its currency (call it Bitcoin). It issued a 3-year bond at par at a coupon rate of 5%, paid annually. The present value of the bond was 100 Bitcoins and it was to be adjusted to euros for exchange rates to attract European and foreign investors. The current spot exchange rate when issued in 2005 was 5 bitcoins per €. The exchange rate at the end of years 1 thru 3 was Bitcoins 5.0 / € (year 1 – same as year 0), 5.5 Bitcoins / € (in year 2), and 6 Bitcoins / € (in Year 3), respectively. What is the exchange-rate adjusted maturity value of the bond in Bitcoins at end of year 3?

a. Euros 116.5

b. Bitcoin 116.5

c. Bitcoin 100

d. Bitcoins 120

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Answer #1

Answer:

Correct answer is:

d. Bitcoins 120

Explanation:

Value at issue in 2005 = 100 Bitcoins

The present value of the bond was 100 Bitcoins and it was to be adjusted to euros for exchange rates to attract European and foreign investors.

The current spot exchange rate when issued in 2005 was 5 bitcoins per €.

The exchange rate at the end of year 3 was 6 Bitcoins / €

Exchange-rate adjusted maturity value of the bond in Bitcoins at end of year 3 = 100 * 6/5 = 120 Bitcoins.

As such option d is correct and other options a,b and c are incorrect.

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