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A French investor recently purchased €20.5 million worth of US dollar denominated corporate bonds with 1...

A French investor recently purchased €20.5 million worth of US dollar denominated corporate bonds with 1 year until maturity that pay 5.5% percent interest annually. The current spot price of Euros for US dollars is €0.9/$1.

a) Is the French investor to an appreciation or depreciation of the euro relative to the dollar?

b) What will be the return on the bond (if held to maturity) if the euro depreciates relative to the dollar such that the spot rate of euros for dollars at the end of one year is €1.02/$1.

c) What will be the return on the bond if the euro appreciates relative to the dollar such that the spot rate of euros for dollars at the end of the year is €0.88/$1

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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

a. The investor would like Euro to depreciate relative to the dollar because he will receive the inflow in the dollar, & if the dollar is strong, then he will get more Euros for each dollar.

b. 19.57%

c. 3.15%

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