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

-An Australian investor buys a U.S. Treasury bond that has a price of $10,000, pays 5 percent interest, and matures in a year. Between the purchase date and the maturity date, the exchange rate changes from $1 = AUD 5.0 to $1= AUD 5.2. What will be the Australian investor's rate of return from the U.S. bond?
A)4 percent
B)7 percent
C)9.2 percent
D)12 percent
E)25 percent

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-An Australian investor buys a U.S. Treasury bond that has a price of $10,000, pays 5 percent interest, and matures in a year. Between the purchase date and the maturity date, the exchange rate changes from $1 = AUD 5.0 to $1= AUD 5.2. What will be the Australian investor's rate of return from the U.S. bond?
A)4 percent 
B)7 percent 
C)9.2 percent 
D)12 percent 
E)25 percent

Quizplus · Accepted Answer

First, we need to convert the price of the U.S. bond from dollars to Australian dollars at the time of purchase:
$10,000 x 5.0 AUD/$1 = 50,000 AUD
Next, we need to calculate the interest earned on the bond:
$10,000 x 0.05 = $500
Using the new exchange rate at the time of maturity, we can convert the $10,500 return from the bond back to Australian dollars:
$10,500 x 5.2 AUD/$1 = 54,600 AUD
The Australian investor's rate of return is the gain in Australian dollars divided by the original investment, expressed as a percentage:
(54,600 - 50,000)/50,000 x 100% = 9.2%
Therefore, the Australian investor's rate of return from the U.S. bond is 9.2%.

The Figure Given Below Depicts the Foreign Exchange Market for British