Total Dollar Return Calculation for Foreign Bond Investment | CFA® Level 1 Exam Prep

Calculate Total Dollar Return for Foreign Bond Investment | CFA® Level 1 Exam Prep

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Question

While studying abroad, United States citizen David Rees purchases a foreign bond with an annual coupon of 8.0 percent for 94.0. He holds the bond for one year and then sells it for 93.0 before he leaves. During the year, foreign currency appreciated 5.0% relative to the U.S. dollar.

Which of the following is closest to Rees's Total Dollar Return?

Answers

Explanations

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A. B. C. D.

D

TheTotal Dollar Returnis calculated as follows:Step 1: Calculate the value change in the foreign currency:The foreign currencyappreciatedby 0.05, or 5.0%.

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+(8.0 + 93.0 "" 94.0)/94.0 ] * (1 + 0.05) } - 1

= { [1.074468 ] * (1.05) } - 1

= 0.12819, or12.819%

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