An investor bought a one-year government bond of Country X with a nominal interest rate of 6 percent.If the current exchange rate between the U.S.dollar and Country X's currency is 50 units per dollar and the expected exchange rate after a year is 48 units per dollar, what is the expected dollar return of investing in Country X's bond?

Question

Quizplus · Accepted Answer

The expected dollar return is 4 percent. The nominal interest rate is 6 percent, and the expected depreciation of Country X's currency is 2 percent (50/48 - 1). The expected dollar return is therefore 6% - 2% = 4%.

An Investor Bought a One-Year Government Bond of Country X