Question

According to the International Fisher Effect, if an investor purchases a five-year U.S. bond that has an 20)_____ annual interest rate of 6% rather than a comparable British bond that has an annual interest rate of 4%, then the investor, at a minimum, must be expecting the ________ to _________ at a rate less than 2% per year

Answer 1

Answer:

British pound: appreciate

Explanation:

International Fisher Theory is an economic theory which establishes a relationship between two country’s exchange and nominal interest rates of their currency.

It states that the expected inconsistency between the exchange rate of two currencies is approximately equal to the difference between their countries' nominal interest rates.

If an investor purchases a five-year U.S. bond that has an annual interest rate of 6% rather than a comparable British bond that has an annual interest rate of 4%, then the investor, at a minimum, must be expecting the British pound to appreciate at a rate less than 2% per year.

The reasoning behind it is that a country with a higher interest rate will also very likely to have a higher inflation rate.