Explore BrainMass

Explore BrainMass

    process of Investment Bonds, Municipal Bonds, CDs, etc,

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    The firm has $150,000 to invest in the spot, forward, or options markets.
    The spot rate is $1.2622 to the euro, and in 12 months, the forward rate is $1.2905 to the euro.
    However, this leader is sure that the exchange rate in 12 months will be $1.33 to the euro.
    Explain how she can speculate on the belief that the euro will be $1.33 in 12 months.
    Calculate the amount of profit (ignoring exchange rate fees) that will be earned and the percentage return achieved.

    2. I have already calculated the numbers for purchasing the Euros at a spot rate detailed here:

    The simply method of taking advantage of the belief that the exchange rate will be $1.33 per euro next year is as follws:

    Purchase euros at the spot rate $150,000/1.2622 = ?118,840.12 euros

    And then hold for 1 year

    Then convert the euros back to dollars at $1.33 X 118,840.12 =$158,057.35

    Profit is $158,057.35 - $150,000 = $8,057.35

    Return on investment is ($8,057.35/$150,000) X 100 = 5.37%

    3. Now, the instructor has made a comment that there may be other investments in bonds, municipal bonds, CDs, etc that offer much lower risk that can pay equal or a higher return.

    4. This is where I need assistance. Please explain the process of Investment Bonds, Municipal Bonds, CDs, etc,

    5. Explain which might be a better choice (other than my spot option in number 2) based on our scenario.

    6. Please cite all references used.


    © BrainMass Inc. brainmass.com June 3, 2020, 10:57 pm ad1c9bdddf

    Solution Preview

    A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower.

    Bonds: In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

    Notes: A promissory note, referred to as a note payable in accounting, is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.

    Municipal Bonds: A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, ...

    Solution Summary

    A debt instrument is defined.