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

Quizplus · Accepted Answer

First, convert the initial investment to US dollars: 
1,500,000 ZAR * $0.205/ZAR = $307,500 
At maturity, the investment will be worth: 
1,500,000 ZAR * 1.10 = 1,650,000 ZAR 
Convert this amount to US dollars using the new spot rate: 
1,650,000 ZAR * $0.203/ZAR = $334,950 
The effective yield can be calculated as: 
($334,950 - $307,500)/$307,500 = 8.92%

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