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

Question

Quizplus · Accepted Answer

The effective yield combines the interest earned and the effect of currency depreciation. The interest earned is 5%, but the pound's depreciation of 9% against the dollar means the U.S. investor effectively loses value on the currency exchange. The combined effect is a negative yield, calculated as (1 + 0.05) * (1 - 0.09) - 1 = -0.0445 or -4.45%.

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