Exhibit 11.1 Assume the Following

question 154

Multiple Choice

Exhibit 11.1 Assume the following:
(1) the interest rate on 6-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States;
(2) today's spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485.
-Refer to Exhibit 11.1.By investing in U.K.treasury bills rather than U.S.treasury bills,and not covering exchange rate risk,U.S.investors earn an extra return of:

• A) 4 percent per year,1 percent for the 6 months
• B) 4 percent per year,2 percent for the 6 months
• C) 2 percent per year,0.5 percent for the 6 months
• D) 2 percent per year,1 percent for the 6 months

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Definitions:

Par Value

The face value of a bond or stock, as stated by the issuing company, which may differ from the market value.

Annual Coupon

The yearly interest amount paid to bondholders, typically expressed as a percentage of the bond's face value.

Default Risk Premium

The additional yield a lender demands to compensate for the risk that the borrower may default on the loan.

Liquidity Premium

Additional yield that investors demand for holding a security that is not easily traded or sold without a significant price reduction.