A US Bank Issues a 1-Year, $1 Million U

question 43

Multiple Choice

A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in 1 year upon maturity of the CD. Spot exchange rates are US $0.78493 per Canadian dollar.
-What is the end-of-year profit or loss on the bank's cash position if in one year Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S. interest rates or current exchange rates. (Choose the closest answer)

• A)Loss of US $5,000.
• B)Profit of US $15,000.
• C)Loss of C $119,000.
• D)Profit of C $50,000.
• E)Loss of C $50,000.

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Definitions:

Secured Party

The party that holds an interest in a secured property.

Priority

The order of importance or urgency assigned to something, which often determines the sequence in which tasks or responsibilities are addressed.

Attachment

The legal process of seizing a debtor's property to secure or satisfy a judgment.

Remedy

The means by which a right is enforced or the violation of a right is prevented, compensated, or corrected in law.