The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Suppose a U.S. firm buys a one-year U.K. bond for 6,000 British pounds when 1 British pound is worth $1.50 on the foreign exchange market. What is the firm's approximate rate of return on the bond if the interest rate on the bond is 15 percent and the exchange rate is 1 British pound worth $1.93 at maturity?
A)11 percent
B)15 percent
C)25 percent
D)33 percent
E)48 percent

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Suppose a U.S. firm buys a one-year U.K. bond for 6,000 British pounds when 1 British pound is worth $1.50 on the foreign exchange market. What is the firm's approximate rate of return on the bond if the interest rate on the bond is 15 percent and the exchange rate is 1 British pound worth $1.93 at maturity?
A)11 percent 
B)15 percent 
C)25 percent 
D)33 percent 
E)48 percent

Quizplus · Accepted Answer

The cost of purchasing the bond in U.K. pounds is: 
6,000 British pounds x $1.50/British pound = $9,000 
At maturity, the bond will be worth: 
6,000 British pounds x $1.93/British pound = $11,580 
The interest earned on the bond is: 
$11,580 - $9,000 = $2,580 
The rate of return is: 
($2,580/$9,000) x 100% = 28.67% 
Rounding to the nearest whole number gives an answer of 48%.

The Figure Given Below Depicts the Foreign Exchange Market for British