Suppose the 1-Year Risk-Free Rate of Return in the U

question 3

Multiple Choice

Suppose the 1-year risk-free rate of return in the U.S.is 5%.The current exchange rate is 1 pound = U.S.$1.60.The 1-year forward rate is 1 pound = $1.57.What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S.investor to invest in the British security

• A)2.44%
• B)2.50%
• C)7.00%
• D)7.62%
• E)None of the options

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Definitions:

Semi-Annually Compounded

Pertaining to the interest calculation method where the interest is compounded and added to the principal amount twice a year.

Compounded Annually

The process of earning interest on both the initial principal and the accumulated interest from previous periods on an annual basis.

Compounded Annually

The calculation of interest on the initial principal and the interest accumulated over the previous periods once a year.

Guaranteed Investment Certificate

A secure investment that guarantees to return the principal amount plus interest at a specified rate.