Assume that a U.S. investor invests in a British CD offering a six-month interest rate of 5%. Over this six-month period, the pound depreciates by 9%. The effective yield on the British CD for the U.S. investor is:

Question

Quizplus · Accepted Answer

The effective yield is the nominal yield plus the percentage change in the exchange rate.

Nominal Yield = 5% 
Percentage Change in Exchange Rate = -9%

Effective Yield = Nominal Yield + Percentage Change in Exchange Rate + (Nominal Yield x Percentage Change in Exchange Rate) 
Effective Yield = 5% + (-9%) + (5% x -9%) 
Effective Yield = 4.45%

Therefore, the effective yield for the U.S. investor is 4.45%, which is represented in choice B as F1F1F1S1F1F1F104.45%.

Assume That a U