Effective Yield Rollins, Inc., has $3 million in cash available for 1 year. It can earn 3 percent on a U.S. Treasury bill or 5 percent on a British Treasury security. The British investment requires conversion of the company’s dollars to British pounds. Assume that interest rate parity holds and that Rollins believes the I-year forward rate is a reliable predictor of the spot rate to be realized 1 year from now. Would the British investment provide an effective yield that is less than, greater than, or equal to the yield on the U.S. investment? Explain your answer.
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.