If you invest $6,000 in a Euro bond for 1 year paying 5% interest. At the time t

Question

If you invest $6,000 in a Euro bond for 1 year paying 5% interest. At the time the investor bought the Euro bond, the exchange rate was $1.00 per Euro.

A). If 1 year later you convert the maturity value of the investment in Euro to US dollars, the exchange rate was $1.02 per Euro, compute the effective yield in US dollar terms.

B). If 1 year later you convert the maturity value of the investment in Euro to US dollars, the exchange rate was $0.95 per Euro, compute the efective yeild in US dollar terms.

Explanation / Answer

Answer:A) Effective Yield=[((1.00)*(1.05))-1.02]/1.00=3%

Answer:B) Effective Yield=[((1.00)*(1.05))-0.95]/1.00=10%

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