An investor based in the United States wishes to invest in Swiss bonds with a maturity oi

Question:

An investor based in the United States wishes to invest in Swiss bonds with a oi one year. Suppose that the ratio of the price levels of a typical consumption basket in the United States versus Switzerland is 1 to 1.5 and the current is $0.62 per Swiss franc. The one-year interest rate is 2 percent in the United States and 4.5 percent in Switzerland. Assume that inflation rates are fully predictable, and expected inflation over the next year is 1.5 percent in the United States and 4 percent in Switzerland.
a. Assuming that real exchange rates remain constant, calculate the real the expected in one year, and the over one year on the Swiss bond in U.S. dollar terms.
b. Now assume that the inflation rate over the one-year period has been 1.5 percent in the United States and 4 percent in Switzerland. Further, assume that the at the end of one year is $0.63 per Swiss franc. Calculate the real at the end of one year. What is the return on the Swiss bond investment now? Is the return on the Swiss 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...