You are a U.S. investor considering purchase of one of the following securities. Assume that the cur

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  1. You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the six- month discount on Canadian-dollar forward contracts is 2.75% versus the U.S. dollar.

Bond

Maturity

Coupon

Price

U.S. government

6 months

6.50%

100.00

Canadian government

6 months

7.50%

100.00

Calculate the expected price change required in the Canadian government bond that would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon. Assume that the yield on the U.S. bond is expected to remain unchanged. (LO 19-2)

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