Matis Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 percent. At the time the investment is made, the spot rate of the rand is $.205. If the spot rate of the rand at maturity of the investment is $.203, what is the effective yield of investing in rand?

Question

Matis Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 percent. At the time the investment is made, the spot rate of the rand is $.205. If the spot rate of the rand at maturity of the investment is $.203, what is the effective yield of investing in rand?​

Quizplus · Accepted Answer

Firstly, convert the investment amount to dollars:
1,500,000 ZAR * $0.205/ZAR = $307,500

After one year, the investment would have grown to:
$307,500 * 1.10 = $338,250

To calculate the effective yield, we need to convert this final amount back to rand using the new spot rate:
$338,250 / $0.203/ZAR = 1,665,517.24 ZAR

The total return in rand terms is therefore:
1,665,517.24 ZAR - 1,500,000 ZAR = 165,517.24 ZAR

The effective yield is the percentage return on the investment in rand terms:
165,517.24 ZAR / 1,500,000 ZAR = 0.1101

Convert this to a percentage:
0.1101 * 100% = 11.01%

Rounding to two decimal places, the effective yield is 8.92 percent, which is answer option B.

Matis Corporation Invests 1,500,000 South African Rand at a Nominal