What is the value of the bond if it is issued at a coupon

Reference no: EM132750158

Question: An investment banker is considering the issue of a one-year Australian dollar/US. dollar currency- option bond. The currency-option bond is to be issued in A$ (A$1,000), and the interest and principal are to be repaid in A$ or US$ at the option of the bondholder. The principal repaid would be either A$l,000 or US$520.83. The current spot exchange rate is A$1.92 per US$. The current one-year market interest rates are 9 percent in A3 and 6 percent in US$. A one- ycar put option on the A$, with a strike price of A951 .92 per US$, is quoted at 3 U.S. cents; this is an option to sell one A36 for 1/US$1.92.

a. What should be the fair coupon rate set on this currency-option bond, according to market conditions?

b. What is the value of the bond if it is issued at a coupon of 3.4 percent?

Reference no: EM132750158

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