Assignment Task 1: Bonds A and B are two straight yen-denominated Eurobonds, with the same maturity of 4 years and the same YTM of 9%.
Bond A has an annual coupon of 11% and is accordingly priced at 106.48%.
Bond B has an annual coupon of 7% and is accordingly priced at 93.52%
1. Compute the simple yield for each of these bonds, as reported sometimes by financial institutions in Japan.
2. What does your answer to part (1) indicate about the potential biases in using the simple yield?
Assignment Task 2: You are British and hold a U.S. Treasury bond with a full price of 100
It has a duration of 10.
Its yield is 5 percent.
The dollar cash rate is 2 percent, and
The pound cash rate is 3 percent.
You expect U.S. yields to move up by 10 basis points over the year.
Required
Give a rough estimate of your expected return if you decide to hedge the currency risk.