Question

In: Economics

Jared is convinced that government bonds from Mexico, currentlyoffering a 6.8% annual yield (treat this...

Jared is convinced that government bonds from Mexico, currently offering a 6.8% annual yield (treat this as the interest rate), are worth taking a chance on even though Jared predicts some depreciation in the Mexican peso against the U.S. dollar in the coming year. Assume the current exchange rate in direct terms is 0.04.

If Jareds financial model anticipates a 2% depreciation in the peso, then how much would 5000 U.S. dollars invested in these Mexican bonds return to Jared in one year's time?

Express your answer in U.S. dollars.

Expert Solution

Question:

Answer:

Toatal investment = $5000

Exchange rate : USD/Mex$ = 0.04

So, total investment in Mex$ = 125,000

Interest rate = 6.8%

Total interest earn = 125,000*6.8% = Mex$ 8500

After depreciation of Mex$ by 2% the exchange rate =

0.04 - (0.04*0.02) = 0.0392

USD/Mex$ = 0.0392

After one year total return = 125,000 + 8500 = Mex$133,500 = $ 5340

But after devaluation of Mex$ the actual return = Mex$133,500 * 0.0392 = $5233.2

Actual return = $5233.2 - $5000 = $233.2

Rahul Sunny answered 2 years ago

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