Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the effective yield of investing in rand?

Question

Quizplus · Accepted Answer

First, we need to calculate the future value of the investment in ZAR:
FV = 1,500,000 x (1 + 0.10) = 1,650,000 ZAR

Next, we need to convert the future value of the investment into USD using the two spot rates given:
FV in USD = 1,650,000 x 0.203 = 334,950 USD

The effective yield is then calculated as follows:
Effective Yield = (FV in USD / PV in USD)^(1/n) - 1
PV in USD = 1,500,000 x 0.205 = 307,500 USD
n = 1 (since we're investing for one period)

Substituting the values:
Effective Yield = (334,950 / 307,500)^(1/1) - 1 = 8.93%

Therefore, the best choice is B, with an effective yield of 8.93%.

Zanada Corporation Invests 1,500,000 South African Rand (ZAR) at a Nominal