Response to the following problem:
Red Electrica España SA (E.REE) is refinancing its bank loans by issuing Eurobonds to investors. You are considering buying $10 000 of these bonds, which will yield 6%. You are also looking at an Australian bond with similar risk that will yield 5%. You expect that interest rates will not change over the course of the next year, after which time you will sell the bonds you purchase.
a. How much will you make on each bond if you buy it, hold it for one year and then sell it for $10 000 (or the Eurodollar equivalent)?
b. Assume the dollar/euro exchange rate goes from 1.11 to 0.98. 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.)