The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

Question

Quizplus · Accepted Answer

Interest rate parity implies that the expected return on an investment in one currency should be equal to the expected return on an investment in another currency, taking into account the exchange rate and interest rates. In this case, the interest rate in the U.K. is higher than the interest rate in the U.S., so U.S. investors will earn a lower return domestically than British investors earn domestically.

The Interest Rate on Pounds in the U