Assume that the domestic interest rate is 7%, and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to appreciate by 4% during the coming year. Given this information, we know that:
A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) the interest parity condition holds.
E) the purchasing power parity holds.

Question

Quizplus · Accepted Answer

Given the domestic interest rate is higher than the foreign interest rate, and the domestic currency is expected to appreciate, individuals will prefer holding domestic bonds because they offer a higher return and the value of the currency is expected to increase, making them more attractive compared to foreign bonds.

Assume That the Domestic Interest Rate Is 7%, and That