Let if be the interest rate being paid on a foreign bond, and let i be the interest rate being paid for a domestic bond; let P be the price of the domestic bond and let Pf be the price of the foreign bond. If exchanges rates are fixed and the bonds are equal in terms of risk:
A) if = i.
B) P = Pf times units of domestic currency/unit of foreign currency.
C) the expected return from the foreign bond = the expected return from the domestic bond.
D) all of the answers given are correct.

Question

Quizplus · Accepted Answer

Under fixed exchange rates and assuming the bonds are equal in terms of risk, interest rate parity would hold, meaning the interest rates (if and i) would be equal to prevent arbitrage opportunities (A is correct). The price of the domestic bond (P) would be equivalent to the price of the foreign bond (Pf) adjusted for the exchange rate, ensuring that the cost is the same in terms of domestic currency (B is correct). Consequently, the expected returns from investing in either bond would be the same when adjusted for exchange rates, as no arbitrage opportunities would exist (C is correct). Therefore, all given answers are correct.

Let If Be the Interest Rate Being Paid on a Foreign