Illustrates the mechanics of covered interest arbitrage

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Reference no: EM132056018

1. Galvatron Metals has a bond outstanding with a coupon rate of 6.6 percent and semiannual payments. The bond currently sells for $1,898 and matures in 16 years. The par value is $2,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt?

a. 6.54%

b. 7.00%

c. 3.94%

d. 4.52%

d. 4.27%

2. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the $1 is borrowed and S0 = spot rate; F1 = one-year forward rate; RF = foreign country risk-free rate; and RUS = U.S. risk-free rate. $1 × S0 × (1 + RF) – $1 × (1 + RUS)/F1 $1 × F1 × (1 + RF)/S0 + $1 × (1 + RUS) $1 × F1 × (1 + RF)/S0– $1 × (1 + RUS) $1 × S0 × (1 + RF)/F1– $1 × (1 + RUS) $1 × S0 × (1 + RF)/F1 + $1 × (1 + RUS).

Reference no: EM132056018

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