The Yields on Zero-Coupon Bonds Are as Follows A Young Investment Banker Considers Issuing a $/Yen Dual-Currency Bond

question 8

Essay

The yields on zero-coupon bonds are as follows:
$$\begin{array} { l c c } & \text { US\$ } \% & \text { Yen\% } \\\hline 1 \text { year } & 3.00 & 500 \\2 \text { years } & 3.50 & 6.00 \\\hline\end{array}$$ A young investment banker considers issuing a $/yen dual-currency bond for ¥100 million. It is a bond with interest paid in yen and principal repaid in dollars. The current spot exchange rate is
$1= ¥100. The bond will be reimbursed for $1 million in two years. The interest is paid on year
one and year two. What should the interest paid in yen be?

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Definitions:

Required Return

The minimum rate of return needed on an investment, determined by the investor’s risk tolerance and the investment’s risk.

NPV

Net Present Value; a calculation used to determine the present value of an investment by discounting its future cash flows.

Initial Investment

The amount of money used to start a new project, purchase an asset, or invest in the market at the initiation phase.

Payback Period

The amount of time it takes to recover the cost of an investment, calculating how long it will take to break even from the initial expenditures.