LG5 P10.15 Red Electrica España SA (E.REE) is refinancing its bank loans by issuing Eurobonds
to investors. You are considering buying $8,000 worth of these bonds, which will
yield 7%. You are also looking at a U.S. bond with similar risk that will yield 4%.
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 now.
a. How much will you make on each bond if you buy it, hold it for one year, and
then sell it for $8,000 (or the Eurodollar equivalent)?
b.
Assume the dollar/euro exchange rate goes from 1.3 to 1.0. How much will this
currency changes affect the proceeds from the Eurobond? (Assume you receive
annual interest at the same time you sell the Eurobond.)
