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Question - Red Electrica Espana SA is refinancing its bank loans by issuing 6.5?% ?euro-denominated bonds to investors. You are considering buying €15,000 of these bonds at par value. You could also invest ?$15,000 in a 5.5% U.S. bond? (also at par? value) with similar credit risk. You expect that interest rates will not change over the course of the next? year, and you will sell the bondsat par value in one year. The exchange rate is currently $1=€1.
Required -
a. How much will you make on each bond if you buy? it, hold it for one? year, and then sell it assuming that the? dollar/euro exchange rate falls from from 1.00 to 0.84 during the? year?
b. How much will this currency change affect the proceeds from the? Eurobond? (Assume you receive annual interest at the same time you sell the? Eurobond.)
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