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Consider a newly issued dollar/yen dual-currency bond. This bond is issued in yen. The coupons are...

Consider a newly issued dollar/yen dual-currency bond. This bond is issued in yen. The coupons are paid in yen and the principal will be repaid in dollars. The market price of this bond is quoted in yen. Discuss what would happen to the market price of this dual-currency bond in the following situations: a. The market interest rate on yen bonds drop significantly. b. The dollar drops in value relative to the yen c. The market interest rate on dollar bonds drop significantly.

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Answer #1

a. If the market interest on yen drops significantly then the market value of the bond issued in yen will go up. This bond becomes attractive when compared to a bond with low coupon.

b. If the dollar value drops in value relative to the yen then the bond quoted in yen also must drop as the repayment of the bond is in dollars and if the dollar value drops, the value of the bond decreases.

c. If the market interest rate drops then the value of the bond rises due to the repayment of the bond in dollars the payoff will be higher.

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