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

-Given a one-year Canadian bond with a yield of 8 percent, what will be the U.S. investor's rate of return at maturity if the Canadian dollar appreciates 10 percent against the U.S. dollar?
A)2 percent
B)8 percent
C)10 percent
D)18 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
 
-Given a one-year Canadian bond with a yield of 8 percent, what will be the U.S. investor's rate of return at maturity if the Canadian dollar appreciates 10 percent against the U.S. dollar?
A)2 percent 
B)8 percent 
C)10 percent 
D)18 percent 
E)25 percent

Quizplus · Accepted Answer

The U.S. investor earns an 8 percent yield on the Canadian bond. However, if the Canadian dollar appreciates 10 percent against the U.S. dollar, the U.S. investor will earn an additional 10 percent return when converting the Canadian dollars back into U.S. dollars. Therefore, the U.S. investor's total rate of return will be 18 percent (8 percent + 10 percent).

The Figure Given Below Depicts the Foreign Exchange Market for British