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Interest rate parity, return on domestic bond

1) In the spot market, 1 U.S. dollar can be exchanged for 121 Japanese yen. In the 1-year forward market, 1 U.S. dollar can be exchanged for 125 Japanese yen. The 1-year, risk-free rate of interest is 5.2 percent in the United States. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities?
a. 1.83%
b. 4.71%
c. 5.03%
d. 5.37%
e. 8.68%

2)A foreign investor who holds tax exempt Eurobonds paying 9 percent interest is considering investing in an equivalent-risk domestic bond in a country with a 27 percent withholding tax on interest paid to foreigners. If 9 percent after-taxes is the investors required return, what before-tax rate would the domestic bond need to pay to provide that after-tax return?
a. 9.00%
b. 10.20%
c. 11.28%
d. 12.33%
e. 13.57%

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Solution Preview

1) Answer: e. 8.68%
F/ S = (1+ Japanese Interest rate) / (1+ US interest ...

Solution Summary

Answers two multiple choice questions on Interest rate parity and before-tax rate return on domestic bond.