Letticia Garcia, an aggressive bond investor, is currently thinking about investing in a foreign (non-dollar-denominated) government bond.

Letticia​ Garcia, an aggressive bond​ investor, is currently thinking about investing in a foreign​ (non-dollar-denominated) government bond. In​ particular, she’s looking at a Swiss government bond that matures in 15 years and carries a coupon of

8.81 %. The bond has a par value of 14,000 Swiss francs​ (CHF) and is currently trading at 105.05 ​(i.e., at 105.05​% of​ par). Letticia plans to hold the bond for a period of 1​ year, at which time she thinks it will be trading at 114.01. ​she’s anticipating a sharp decline in Swiss interest​ rates, which explains why she expects bond prices to move up. The current exchange rate is 1.61 ​CHF/U.S.$, but she expects that to fall to 1.24 ​CHF/U.S.$. Use the foreign investment total return formula to find the following information.

a. Ignoring the currency​ effect, find the​ bond’s total return​ (in its local​ currency).

b. Now find the total return on this bond in U.S. dollars. Did currency exchange rates affect the return in any​ way? Do you think this bond would make a good​ investment? Explain.

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