Author Question: You have some money on deposit in a bank account which pays a nominal (or quoted) rate of 8.0944 ... (Read 172 times)

jenna1 · **on:** Jul 10, 2018

You have some money on deposit in a bank account which pays a nominal (or quoted) rate of 8.0944 percent, but with interest compounded daily (using a 365 day year). Your friend owns a security which calls for the payment of 10,000 after 27 months.

The security is just as safe as your bank deposit, and your friend offers to sell it to you for 8,000. If you buy the security, by how much will the effective annual rate of return on your investment change?
A) 1.87
B) 1.53
C) 2.00
D) 0.96
E) 0.44

Question 2

The current direct quote in New York is .01075 dollars per yen. Suppose the current direct quote in Tokyo is 91
yen per dollar.

What is the appropriate indirect quote in New York? What will arbitrageurs do to eliminate the
differential rates in these markets?

mariahkathleeen · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

C

Answer to Question 2

Indirect quote in New York = 1/.01075 = 93.023 yen per dollar.
Arbitrageurs will buy yen in New York where the price is .01075 dollars per yen and sell yen in Tokyo where the price
is .01099 dollars per yen. The increase in demand in New York will increase the price while the selling pressure in
Tokyo will lower the price.