Question

Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price...

Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?

a. −7.92%
b. 6.00%
c. −4.13%
d. 12.00%
e. 8.25%
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Answer #1
Bond in foreign currency
Purchase price of bond $9,708.74
Exchange rate 1 $ = 1.42 Swiss Francs
So, purchase cost in Swiss Francs 13786.4108 Swiss Francs
(9708.74 * 1.42)
Maturity amount $10,000.00
Exchange rate 1$ = 1.324 Swiss Francs
So, Maturity amount in Swiss Francs Swiss Francs
(1000* 1.324) = $13,240.00
Time of Holding = 6 months
Annualized rate of return = (Maturity amount - Purchase price) / Purchase price * 12/no. of months
(in Swiss francs)   (13240 - 13786.4108) / 13786.4108 * 12/6
-7.92%
So, Annualized rate of return to swiss investor is -7.92%
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