A portfolio manager based in the United Kingdom is planning to invest in U.S. bonds with a

Question:

A manager based in the United Kingdom is planning to invest in U.S. bonds with a of one year. Assume that the ratio of the price levels of a typical consumption basket in the United Kingdom versus the United States is 1.2 to 1. The current is £0.69 per dollar. The one-year interest rate is 1.76 percent in the United States and 4.13 percent in the United Kingdom. Assume that inflation rates are fully predictable, and expected inflation over the next year is 1.5 percent in the United Stales and 3.75 percent in the United Kingdom.
a. Assuming that real exchange rates remain constant, calculate the real the expected in one year, and the over one year on the U.S. bonds in pounds.
b. Now assume that the inflation rate over the one-year period has been 1.5 percent in the United States and 3.75 percent in the United Kingdom. Further, assume that the at the end of one year is £0.67 per dollar. Calculate the real at the end of one year. What is the return on the U.S. bond investment now? Is the return on the U.S. bond the same as in part (a)? Explain.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...