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Answer: +9.750%
Compute the ending value of each investment and compare it with the cost of funding. **1) U.S. bond investment** \[ 100.0 \times 1.04 = 104.0 \text{ million USD} \] **2) Brazilian bond investment** Convert $100.0 million to BRL at 3.5 BRL per USD: \[ 100.0 \times 3.5 = 350.0 \text{ million BRL} \] Grow at 5%: \[ 350.0 \times 1.05 = 367.5 \text{ million BRL} \] Convert back at 3.0 BRL per USD: \[ 367.5 / 3.0 = 122.5 \text{ million USD} \] **3) Total asset value at maturity** \[ 104.0 + 122.5 = 226.5 \text{ million USD} \] **4) Repay CDs** \[ 200.0 \times 1.035 = 207.0 \text{ million USD} \] **5) Net profit and return** \[ 226.5 - 207.0 = 19.5 \text{ million USD} \] \[ \text{Net return} = \frac{19.5}{200.0} = 9.75\% \] So the correct answer is **+9.750%**.
Author: Manit Arora
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Question 501.3. City Bank issued $200.0 million of one-year CDs in the United States at a rate of 3.50%. It invested part of this money, $100.0 million, in the purchase of a one-year bond issued by a U.S. firm at an annual rate of 4.0%. The remaining $100.0 million was invested in a one-year Brazilian government bond paying an annual interest rate of 5.0%. The exchange rate at the time of the transaction was USD/BRL R$3.5000. If the Brazilian real appreciates (against the dollar) from R$3.5000 to R$3.0000, what is the net return on this $200.0 million investment? (Note: variation on Saunders’ Question #10).
A
+3.470%
B
+5.833%
C
+9.750%
D
+12.930%
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