Question

The annual yield on government-issued bonds in Japanese Yen is 5%. The analyst say that Yen will depreciate by 2% in the following year. If the Fisher Effect holds, what should be the yield on the one-year US T-Bills?

Answer 1

Fisher effect is phenomenon of actual returns taking inflation into consideration.

According to which the Real rate of return for T-Bills is Nominal Interest minus Expected inflation rate

if Yen will depreciate by 2% means expected inflation rate is also 2%

Therefore, Actual or Real interest rate will be 5% - 2%

i.e 3%

Therefore, yeild on one year T-Bills will be 3% rather than 5%