Consider That the One-Year Euro Interest Rate Is Greater Than

question 25

Multiple Choice

Consider that the one-year Euro interest rate is greater than the US one-year interest rate.How does the one-year forward exchange rate (USD per EUR) compare to the spot exchange rate (USD per EUR) ?

• A)The forward rate is larger than the spot rate
• B)The forward rate is smaller than the spot rate
• C)The forward rate is equal to the spot rate
• D)There is not enough information to answer this question

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Definitions:

Zero-coupon Bond

A bond that does not pay periodic interest and is sold at a discount from face value; its return comes from the difference between the purchase price and the face value paid at maturity.

Yield

The income return on an investment, such as the interest or dividends received, usually expressed as an annual percentage based on the investment's cost, its current market value, or its face value.

Zero-coupon Bond

A debt security that does not pay interest (coupon) but is traded at a deep discount, providing profit at maturity when the bond is redeemed for its face value.

Purchase Price

The amount of money paid to buy goods, services, or assets.