Determining Investment Viability Threshold
A US-based investment fund has a policy to only consider foreign assets projected to yield at least a 2.5% nominal return in US dollars. The fund is evaluating a 1-year government bond from New Zealand that offers a nominal interest rate of 4.75% in its local currency. Based on the approximation formula for foreign investment returns, what is the maximum rate at which the New Zealand dollar can be expected to depreciate against the US dollar for this bond to remain a viable investment option for the fund? Show your calculation.
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Introduction to Macroeconomics Course
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Impact of Currency Depreciation on Foreign Investment Returns
Investment Condition: Compensating for Expected Depreciation
Brazilian Bond Investment Scenario
An American investor is considering a foreign bond that pays a nominal interest rate of 4%. Over the investment period, the foreign currency in which the bond is denominated is expected to appreciate by 1.5% against the US dollar. Using the approximation formula for calculating the return in an investor's home currency, what is the investor's expected nominal rate of return in US dollars?
Inferring Currency Expectations
An investor is evaluating two separate foreign government bonds.
- Bond X is issued in a country where the nominal interest rate is 7%, and the local currency is expected to depreciate by 4% against the investor's home currency.
- Bond Y is issued in a different country where the nominal interest rate is 5%, and the local currency is expected to depreciate by 1.5% against the investor's home currency.
Using the standard approximation for calculating the rate of return in the investor's home currency, which statement accurately compares the expected returns?
Evaluating the Utility of the Foreign Investment Return Approximation
A Canadian investor is considering purchasing a one-year government bond from Australia. The Australian bond offers a nominal interest rate of 5.5%. The investor's home policy rate in Canada is 4.0%. Financial analysts expect the Australian dollar to depreciate by 2.0% against the Canadian dollar over the next year. Based on the standard approximation formula, what is the investor's expected nominal rate of return in Canadian dollars?
An international investor is monitoring a government bond from Country X. The nominal interest rate on this bond has not changed. However, the investor's projected rate of return, once converted back to their home currency, has recently decreased. According to the standard approximation formula for foreign investment returns, which of the following events is the most plausible cause for this decrease?
An investor is considering a foreign bond with a nominal interest rate of 6%. If the foreign currency is expected to depreciate by 7% against the investor's home currency, the investor's approximate nominal rate of return in their home currency will be positive.
Determining Investment Viability Threshold
Comparative Foreign Investment Analysis