Consider the Following: an Investor in the U

question 61

Multiple Choice

Consider the following: an investor in the U.S. is pondering a one-year investment. She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if. The current exchange rate is $1.50/£ . She considers the bonds to be of equal risk. If i = if, the expected returns are not equal. What do you know?

• A) The exchange rate is fixed between the U.S. and Britain
• B) The bonds initially sold for different prices
• C) Arbitrage doesn't work
• D) The exchange rate must be flexible

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Definitions:

NPV Profiles

Graphical representations showing the relationship between a project's Net Present Value (NPV) and various discount rates.

Mutually Exclusive

Situations or events that cannot occur at the same time or cannot both be true or exist simultaneously.

Cross

In finance, often refers to a currency pair trade in foreign exchange that does not involve the US dollar.

Modified Internal Rate

An adjusted version of the internal rate of return (IRR) calculation that takes into account changes in the cost of capital or cash flow pattern.