Assume that an American investor decides to buy one-year Swiss bonds that are denominated in Swiss francs and pay 2 percent annual interest. For this purpose, $10,000 is exchanged into Swiss francs at an exchange rate of $1 = 2Fr to buy the bonds. How many dollars will the investor have after one year if the exchange rate is $1 = 1.5Fr?

Question

Quizplus · Accepted Answer

The investor buys Swiss bonds for $10,000 at an exchange rate of $1 = 2Fr. Therefore, the investor gets 20,000 Swiss francs (10,000 * 2) worth of bonds. At 2 percent annual interest, the investor will receive 400 Swiss francs (20,000 * 0.02) in interest after one year.

Now, if the exchange rate is $1 = 1.5Fr after one year, the investor's 20,400 Swiss francs will be worth $13,600 (20,400 * 1.5) in dollars.

Therefore, the investor will have $13,600 after one year. Option D is the correct answer.

Assume That an American Investor Decides to Buy One-Year Swiss