An analyst gathered the following information about a 7% coupon foreign bond: Initial price 100 Holding period 1 year End of holding period price 96 Foreign currency appreciation 6% during holding period The bond’s total dollar return for the holding period is closest to: a. -3.2% b. 1.8% c. 3.0% d. 9.2% — I think I might have messed up on what exactly the question was asking, thoughts?

A

without currency appreciation HPR is 3% With currency appreciation 1.8% So the answer is B

believe it or not the answer is 9.2 -_- (with currency appreciation)

Can we please have the steps rouman?

This was the solution that was presented to me (96+7)/100 * 1.06-1 = 9.18 It caught me off because I used the HPR formula which states: (P1-P0+income)/p0 Anyone have any thoughts on why this is the way it is? regards

9.2 makes sense. You’re just confusing too mathmatically identical formula I believe.

mcf can you elaborate on the two different formulas? its just i don’t see the formula that derived 9.18. I mean i know how to get to 9.18 after looking at the solution but my thought process hasn’t accepted the process because I don’t understand it conceptually. Thanks

May be I am confused by the relatioship between currency appreciation and exchange rate.

further explanation are welcome

So, when he bought the bond he paid Can$100 for it, and the exchange rate was 1Can = 1 US. One year later, the bond paid coupon of 7 Can and he sold the bond for 96 Can , for a total of Can 103. In the mean time, the Can appreciated 6% relative to the US$ , that is, a 1Can$=1.06US$, so his investment values Can$103*1.06US/CAN$=US$109.18 HPY=(109.18-100)/100=9.18%~9.2%.

Thats a good one MAP1

I get D as answer. Outflows = -100 Inflows = 3.5, 3.5, 96 Difference = 3 currency appreciateion = 6% of the total value he has had the end of year 103 x 1.06 = 109.18 hence HPY = 109.18/100 - 1 ==> 9.18 WHAT IS THE CORRECT ANSWER.

hey guys, but where are you all from? From USA I guess.

ANSWER is D what is going on here: simply HPR question “tweaked” with the foreign currency at the end Step 1: HPR = EV + coupon / (BV) = 96 + 7/100 = 1.03% step 2: 1.03% * 1.06 = 1.09 step 3: 1.09% - 1 ----> 9% PICK D

strangedays where are you from yourself?

map1 Wrote: ------------------------------------------------------- > So, when he bought the bond he paid Can$100 for > it, and the exchange rate was 1Can = 1 US. > > One year later, the bond paid coupon of 7 Can \> and he sold the bond for 96 Can , for a total of > Can 103. \> \> In the mean time, the Can appreciated 6% relative > to the US$ , that is, a 1Can$=1.06US$, so his > investment values Can$103*1.06US/CAN$=US$109.18 > > HPY=(109.18-100)/100=9.18%~9.2%. Map1 and everyone else thanks for the explanation. I guess I was just caught up on using the following formula: HPR = (Ending - Beginning + Income) / Beginning value I thought the question was asking for Holding Period Return of the bond… so I figured i could use the above formula

(96-100+7)/100 = 3% 1.03*1.06 = 1.0918 9.18% HPR

heha168 Wrote: ------------------------------------------------------- > (96-100+7)/100 = 3% > 1.03*1.06 = 1.0918 > 9.18% HPR Ahhh i see it! -_- Thanks!

It is D. It is a simple HPR prob that tries to throw you off with the FC adjustment. Remember to subtract 1 as the LAST step. You should get 9.18% and rd up to 9.2% thanks