COMM 122 Study Guide - Final Guide: Callable Bond, Foreign Exchange Spot, Risk-Free Interest Rate

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1 Oct 2017

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Abc has just issued 20,000 perpetual bonds at par, each with a face value of . These bonds pay an annual coupon of 10%. One year from now, there is an 80% probability that the interest rate (ytm) on this bond will rise to 12%, and a 20% probability that it will fall to 6%. Your firm is considering an investment opportunity in the republic of sarnia. The currency in the republic of sarnia is called the solaris. The project costs 10m solaris and is expected to produce cash flows of 5m solaris in year 1 and 15m solaris in year 2. The current spot exchange rate is . 00/solaris and the expected inflation rate in canada is 3 percent, compared to that in sarnia of 15 percent. The appropriate discount rate for the project is estimated to be 12 percent, the canadian cost of capital for the company.