The chronic inability of California to balance its budget has forced Congress to authorize the state to issue/adopt its own currency in order to permit monetization of the state?s massive public indebtedness. Units of this currency, the C-Note, have a spot exchange rate with the U.S. dollar of $5.0000/CN 1. The risk-free interest rate on zero-coupon US Treasury notes having 2 years to maturity is 1.0 percent per year. By contrast, the interest rate on risk-free C-Note-denominated zero-coupon bonds having 2 years to maturity is 9.5 percent. Assuming that the forward exchange rate for an exchange of dollars and C-Notes at the end of two years is $4.00/CN1, determine whether an investor with a 2-year investment horizon should invest in US Treasury notes or California C-Note-denominated bonds.
Paper#7287 | Written in 18-Jul-2015Price : $25