Question

 

- Suppose the current interest rate is 6%. What price should we expect to pay for a three-month Treasury bill with face value $10,000 that is a month old?

- Suppose the US dollar is depreciating against the Canadian dollar by 5% per year. If the US nominal interest rate is 10%, and the risk premium is 1%, then Canad's nominal interest rate is:

- Suppose Canada and the US are in an equilibrium with a flexible exchange rate and a risk premium of 1%. The real rates of growth in Canada and in the US are both 3%, but the US interest rate is 8% and the Canadian interest rate is 11%. The Canadian dollar is:

Answer 1

$1,000 Treasury bill -180 days to maturity, current intrest rate 6% and month old. To calculate the price, take 90 days and multiply by 6% to get 540. Then, divide by 360 to get 1.75, and subtract 100 minus 0.75. The answer is 98.5. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 98.5 by 10 to get the final price of $985.00.

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(1 + i_d) = (S / F) * (1 + i_f).

i_d = interest rate in the domestic currency

i_f = interest rate in the foreign currency

S is the current spot foreign exchange rate.

F is the forward foreign exchange rate.

US dollar is depreciating by 5% per year assuming 1US$ will depreciate to .95 in the following year.

F/S = .95/1 = .95. In terms of canadian dollars 1/.95 = 1.05263

Nominal interest rate is 10%, + the risk premium is 1%

Canad's nominal interest rate is (1 + i_d) = .95 * (1.11) = 1.0545

Canad's nominal interest rate is i_{d =} 1.0545 -1 = .0545 = 5.45%

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Inflation rate = (Nominal rate + Risk premium - Real rate)

For example, Canada has an inflation rate of 9% (11% + 1% - 3%) and the US has an inflation rate of 6% (8% + 1% -3%), the Canadian Dollar will depreciate against the US Dollar by 3% per year (9% - 6%).