Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10%. 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

Quizplus · Accepted Answer

First, we need to convert the initial investment of 1,500,000 rand to dollars:
1,500,000 rand x $0.205/rand = $307,500

At a nominal interest rate of 10%, the investment would be worth:
$307,500 x (1 + 0.10) = $338,250

At maturity, we need to convert the investment value back to dollars using the new spot rate:
$338,250 x $0.203/rand = 1,727,923.50 rand

So the effective yield is:
(1,727,923.50 rand / 1,500,000 rand)^(1/1) - 1 = 0.152 ^0.02 - 1 = 0.0289 or 2.89%

But this is the effective yield in rand. To get the effective yield in dollars, we need to convert the final value back to dollars using the new spot rate:
1,727,923.50 rand x $0.203/rand = $351,292.52

So the effective yield in dollars is:
($351,292.52 / $307,500)^(1/1) - 1 = 0.141 ^0.02 - 1 = 0.0289 or 2.89%

Therefore, the answer is B) 8.92%.

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