Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?

Question

Quizplus · Accepted Answer

Initially, you convert $1000 to pesos at a rate of 10 pesos per dollar, giving you 10,000 pesos. After one year, the bond pays 10% interest, so you have 11,000 pesos. When you convert back to dollars at the new exchange rate of 11 pesos per dollar, you get $1000, as 11,000 pesos / 11 pesos per dollar = $1000.

Suppose the Exchange Rate Is 10 Pesos Per Dollar and You