While working abroad, United States citizen Elpida Costa purchases a foreign bond with an annual coupon of 10.0 percent for par. She holds the bond for one year and then sells it for 103.6 before she leaves. During the year, the dollar depreciated 2.0% relative to the foreign currency.
Which of the following is closest to Costa's Total Dollar Return?
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A. B. C. D.C
TheTotal Dollar Returnis calculated as follows:
Step 1: Calculate the value change in the foreign currency:
The dollardepreciated0.02, so the foreign currencyappreciatedby 0.02, or 2.0%.
Step 2: Use the Total Dollar return formula to calculate the return:
R$= { [ 1+($coupon + VEND- VBEG)/ VBEG] * (1 + g) } - 1,
WhereR$=Total dollar return,VEND= Bond value at end of period,VBEG =Bond value at end of period, andg= % change in thedollarvalue of the foreign currency.
Here,R$= { [ 1+(10.0 + 103.6 "" 100.0)/100.0 ] * (1 + 0.02) } - 1
= { [1.13600 ] * (1.02) } - 1
= 0.15782, or15.782%