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

-Assume a U.S. investor buys a Mexican bond with a face value of MXP 1,000 and a 20 percent annual interest yield while the exchange rate is MXP 10 per dollar. What is the dollar return from the bond if the exchange rate at the end of the year is MXP 11 per dollar?
A)9.1%
B)10.0%
C)18.2%
D)20.0%
E)32.0%

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Assume a U.S. investor buys a Mexican bond with a face value of MXP 1,000 and a 20 percent annual interest yield while the exchange rate is MXP 10 per dollar. What is the dollar return from the bond if the exchange rate at the end of the year is MXP 11 per dollar?
A)9.1% 
B)10.0% 
C)18.2% 
D)20.0% 
E)32.0%

Quizplus · Accepted Answer

The bond's interest is MXP 200 (20% of MXP 1,000). Initially, MXP 1,200 is worth $120 (MXP 1,200 / 10). At the end of the year, MXP 1,200 is worth $109.09 (MXP 1,200 / 11). The dollar return is ($109.09 - $100) / $100 = 9.1%.

The Figure Given Below Depicts the Foreign Exchange Market for British