Determine the expected us dollar cash flows

Reference no: EM131227351

Bond Value Sensitivity to Exchange Rates and Interest Rates Cardinal Company, a U.S.-based insurance company, considers purchasing bonds denominated in Canadian dollars, with a maturity of six years, a par value of C$50 million, and a coupon rate of 12 percent. Cardinal can purchase the bonds at par.

The current exchange rate of the Canadian dollar is $0.80. Cardinal expects that the required return by Canadian investors on these bonds four years from now will be 9 percent. If Cardinal purchases the bonds, it will sell them in the Canadian secondary market four years from now. It forecasts the exchange rates as follows:

YEAR	EXCHANGE RATE OF CS	YEAR	EXCHANGE RATE OF CS
1	$0.80	4	$0.72
2	0.77	5	0.68
3	0.74	6	0.66

a. Refer to earlier examples in this chapter to determine the expected U.S. dollar cash flows to Cardinal over the next four years. Determine the present value of a bond.

b. Does Cardinal expect to be favorably or adversely affected by the interest rate risk? Explain.

c. Does Cardinal expect to be favorably or adversely affected by exchange rate risk? Explain.

Reference no: EM131227351

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