1A U.S. company purchases a 90-day certificate of deposit from a Singapore bank
ID: 2563396 • Letter: 1
Question
1A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15, when the spot rate is $0.72/S$. The certificate has a face value of S$1,000,000 and pays interest at an annual rate of 3 percent. On August 13, the certificate of deposit matures and the company receives principal and interest of S$1,007,500. The spot rate on August 13 is $0.69/S$. The average spot rate for the period May 15 – August 13 is $0.70/S$. The company’s accounting year ends December 31. The total exchange gain or loss on this investment is: A. $20,000 loss B. $20,000 gain C. $30,000 gain D. $30,000 loss
Explanation / Answer
Face Value of Certificate = S$1,000,000
US Company would record on the purchase of certificate of deposit by using spot rate on the date of purchase.
US Company will record investment with $720,000 (S$1,000,000 * 0.72)
Spot Rate at maturity of Investment i.e. $0.69 / S$
The maturity proceeds from Investment using Spot Rate (S$1,000,000 * 0.69) = $690,000
Hence, the total exchange loss on this Investment is $720,000 - $690,000 = $30,000 loss
The correct option is D. $30,000 loss
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