Suppose the U.S.one-year interest rate is 3% per year,while a foreign country has a one-year interest rate of 5% per year.Ignoring risk and transaction costs,a U.S.investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is
A)less than 5%.
B)greater than 5%.
C)greater than 2%.
D)less than 2%.
E) less than 1%.

Question

Quizplus · Accepted Answer

For the investment in foreign bonds to be beneficial, the expected depreciation of the foreign currency must be less than the interest rate differential, which is 2% (5% foreign interest rate - 3% U.S. interest rate).