Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:

Question

Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:​

Quizplus · Accepted Answer

The effective yield for non-U.S. firms investing in U.S. Treasury securities would have been more than the interest rate of their respective countries due to the appreciation of the dollar against their currencies. As the dollar strengthens, when these firms convert their investment returns back into their local currency, they receive more money than they would have from an equivalent investment in their own country, assuming interest rates are similar. This is because the gain from the currency appreciation adds to the interest earned on the U.S. securities.

Assume That in Recent Months, Most Currencies of Industrialized Countries