Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 per cent. At the time the investment is made, the spot rate of the rand is £0.114. If the spot rate of the rand at maturity of the investment is £0.111, what is the effective yield of investing in rand?

Question

Quizplus · Accepted Answer

The effective yield considers both the nominal interest rate and the change in the exchange rate. The nominal interest rate is 10%, but the rand depreciates from £0.114 to £0.111. The effective yield is calculated as (1 + nominal interest rate) * (final exchange rate / initial exchange rate) - 1 = (1 + 0.10) * (0.111 / 0.114) - 1 = 7.11%.

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