Suppose You Purchase a 10-Year AAA-Rated British Bond for Par

question 37

Multiple Choice

Suppose you purchase a 10-year AAA-rated British bond for par that is paying an annual coupon of 9 percent and has a face value of 1,000 British Pounds (£) . The spot rate is US$1.105 for £. At the end of the year,the bond is downgraded to AA and the yield increases to 11 percent. In addition,the new spot rate becomes US$0.985 for £.
What is the loss or gain to a British investor who holds this bond for a year?

• A)−11.07% loss
• B)−7.14% loss
• C)−5.32% loss
• D)−2.07% loss
• E)−1.08% loss

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