Chapter 18, Problem 4ST

In December 2001, Argentina announced it would nothonor its sovereign (government-issued) debt. Manyinvestors were left holding Argentinean bonds pricedat a fraction of their previous value. A few years later,Argentina announced it would pay back 25% of the face value of its debt. Comment on the effects of information asymmetries on government bond markets. Doyou think investors are currently willing to buy bondsissued by the government of Argentina?

PIMCO gives the following example of an Inflation Linked Bond (ILB), called a Treasury Inflation Protected Security (TIPS) in the US. "How do ILBs work? An ILB’s explicit link to a nationally-recognized inflation measure means that any increase in price levels directly translates into higher principal values. As a hypothetical example, consider a $1,000 20-year U.S. TIPS with a 2.5% coupon (1.25% on semiannual basis), and an inflation rate of 4%. The principal on the TIPS note will adjust upward on a daily basis to account for the 4% inflation rate. At maturity, the principal value will be $2,208 (4% per year, compounded semiannually). Additionally, while the coupon rate remains fixed at 2.5%, the dollar value of each interest payment will rise, as the coupon will be paid on the inflation-adjusted principal value. The first semiannual coupon of 1.25% paid on the inflation-adjusted principal of $1,020 is $12.75, while the final semiannual interest payment will be 1.25% of $2,208, which…

In a daily meeting, the Chief Financial Officer (CFO) gave Ari the following table of market rates: Spot exchange rate: Yen 106/$ U.S. dollar interest rate per annum 10% Japanese Yen interest rate per annum 6% and told Ari that the company’s financial analyst expected the Japanese Yen to depreciate against the U.S. dolla rby 3.46%in 90 days.Assume there are 360 days in a year, and all interest rates are simple interest rates.If the financial analyst’s prediction about the US dollar and Japanese Yen turned out to be true: 1) What would the spot exchange rate (Yen/$) be in 90 days? 2) Would Ari make a profit by borrowing 1 million US dollar and investing in the money markets? If yes, how much profit would Ari realise in 90 days? If no, explain why.