Question

Use the information in the Washington Post article, A New Economic Mystery: Negative Interest Rates to answer the questions. Which of the first set of investment options will give the best return? buying $1,000 worth of euros while expecting the euro to depreciate by 7.75% over the next year O putting $1,000 in an account that has a 5.5% annual service charge and earns no interest O buying a bond for $1,000 with the expectation of selling it in a year for $950 Which of this second set of investment options will give the best return? O putting $1,000 in a savings account that has a 2.5% interest rate and no service fee while expected inflation is 3.5% O putting $1,000 in an account that has a 3% annual service charge and earns no interest O buying a bond for $1,000 with the expectation of selling it in a year for $950

Answer 1

Anst) is buying $1000 worth of euros while expecting the cuso to depriciate by 7.75% over the next year. i. The band will have a value of 1000-77.5 922:50 ('li) putting $1000 in an account that has a 5.5% annual seaulice charge and eams no interest. Final anaunt after 1 year es = 1000-55 945 (ii) Buying a band for $1,000 with expectation of selling it in a year for $950 Interent fore gone = 1000-950/100 = 5% 1000 Hence, the best option in team of Returns in 2nd option. Aus2.) (i) $1000 in savings account that has 2.5% interest rate while enpected inflation is 85% o. Net interest = 2.5-3.5 = -1% on Balance after year = 1000-10 = $990 ci $ 1000 with 3% annual service charge .. u. Balance after 1 year - 1000-30 = $940 (ii) Buying bond of & 1000 and selling at $950 after 1year Hence 1st option gives the best & returers