Explanation:
Step 1: Calculate the cost of the CDs (financing cost)
$200.0M × 3.50% = $7.0MStep 2: Calculate proceeds from the U.S. bond
$100.0M × 4.0% = $4.0M$100.0M + $4.0M = $104.0MStep 3: Calculate proceeds from the Brazilian bond
$100.0M × 3.5000 = R$350.0M$350.0M × 5.0% = R$17.5M$350.0M + R$17.5M = R$367.5M$3.0000/USD): R$367.5M / 3.0000 = $122.5MStep 4: Calculate the net return
$104.0M + $122.5M = $226.5M$226.5M - $7.0M - $200.0M) / $200.0M = $19.5M / $200.0M = 9.75%The answer is c) +9.750%.
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Q-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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