CFA Level 1: Total Dollar Return Calculation

Total Dollar Return Calculation

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Question

While working abroad, United States citizen Alex Beggs purchases a foreign bond with an annual coupon of 7.0 percent for 93.0. He holds the bond for one year and then sells it for 95.5 before he leaves. During the year, the dollar appreciated 2.5% relative to the foreign currency.

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

Answers

Explanations

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A. B. C. D.

Explanation

TheTotal Dollar Returnis calculated as follows:

Step 1: Calculate the value change in the foreign currency:

The dollarappreciated0.025, so the foreign currencydepreciatedby 0.025, or 2.5%.

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+(7.0 + 95.5 "" 93.0)/93.0 ] * (1 - 0.025) } - 1

= { [1.102151 ] * (0.975) } - 1

= 0.07460, or7.460%

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