Assume that a U.S.investor invests in a British CD offering a sixmonth interest rate of 5%. Over this sixmonth period,the pound depreciates by 9%. The effective yield on the British CD for the U.S.investor is:

Question

Assume that a U.S.investor invests in a British CD offering a sixmonth interest rate of 5%.  Over this sixmonth period,the pound depreciates by 9%.  The effective yield on the British CD for the U.S.investor is:

Quizplus · Accepted Answer

The effective yield for the U.S. investor can be calculated using the formula:

Effective yield = (1 + foreign interest rate) x (1 + % change in exchange rate) - 1

In this case, the foreign interest rate is 5%, and the % change in exchange rate is -9%.

Plugging in the numbers, we get:

Effective yield = (1 + 0.05) x (1 - 0.09) - 1 
                   = 1.05 x 0.91 - 1 
                   = 0.9555

Therefore, the effective yield for the U.S. investor is 0.9555, or 9.555%.

However, we need to convert this into a six-month yield. Since the investment is for six months, we need to annualize the effective yield by compounding it twice (once every six months).

So, the six-month effective yield can be calculated as:

(1 + 0.09555/2)^2 - 1 = 0.1400 = 14.00%

Therefore, the best choice is C) 14.00%.

Assume That a U