Question

In 2010, Bolivia in crisis issued an exchange-rate adjusted (to €) bond in its currency (call...

In 2010, Bolivia in crisis issued an exchange-rate adjusted (to €) bond in its currency (call it fitbit). It issued a 3-year bond at par at a coupon rate of 8%, paid annually. The present value of the bond was 100 fitbits 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 2010 was 10 fitbits per €. The exchange rate at the end of years 1 thru 3 was fitbits 10.0 / € (year 1 – same as year 0), 11 fitbits / € (in year 2), and 12 fitbits / € (in Year 3), respectively. What is the exchange-rate adjusted coupon amount in fitbits in Year 2?

a.

Fitbits 8
b.

Fitbits 9.6
c.

Fitbits 8.8
d.

Euros 8
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Answer #1

Answer:

Correct answer is:

c. Fitbits 8.8

Explanation:

Bond par value = 100 fitbits

Annual coupon rate = 8%

Annual coupon amount = 100 * 8% = 8 fitbits

The present value of the bond was 100 fitbits 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 2010 was 10 fitbits per €.

The exchange rate at the end of years 2 is 11 fitbits / €

Exchange-rate adjusted coupon amount in fitbits in Year 2 = 8 * 11/10 = 8.80 fitbits

Exchange-rate adjusted coupon amount in fitbits in Year 2 = 8.8 fitbits

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

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