Consider the following: if is the interest rate being paid on a foreign bond, and i is the interest rate being paid for a domestic bond; P is the price of the domestic bond and Pf is the price of the foreign bond.If exchanges rates are fixed and the bonds are equal in terms of risk:

Question

Quizplus · Accepted Answer

All of the given choices are correct. If the interest rates are equal, there is no advantage to holding one bond over the other based on interest payments alone. The prices of the bonds are related by the fixed exchange rate, meaning that the ratio of the prices will be determined by the exchange rate. Finally, if the bonds are equal in terms of risk, then the expected return of each will be the same.

Consider the Following: If Is the Interest Rate Being Paid