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The Insufficiency of Nominal Interest Rates for International Investment
An investor observes that a one-year government bond in a foreign country offers a significantly higher nominal interest rate than an equivalent bond in their home country. Explain in detail why this positive interest rate differential does not automatically make the foreign bond the better investment. What key factor, related to the currencies of the two countries, must the investor also consider, and how does this factor influence the final, overall return when measured in the investor's home currency?
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