Assume the U.S. one-year interest rate is 5 percent, while the South African one-year interest rate is 13 percent. If a U.S. firm invests in a South African one-year deposit, and the South African rand remains constant over the next year, the U.S. firm will earn an effective yield of:

Question

Assume the U.S. one-year interest rate is 5 percent, while the South African one-year interest rate is 13 percent. If a U.S. firm invests in a South African one-year deposit, and the South African rand remains constant over the next year, the U.S. firm will earn an effective yield of:​

Quizplus · Accepted Answer

The U.S. firm will earn the South African one-year interest rate of 13 percent, as long as the exchange rate between the U.S. dollar and the South African rand remains constant. Therefore, the effective yield for the U.S. firm will be 13 percent, which is the answer choice (D).