Suppose that you are deciding whether to invest $100,000 in a one-year government bond in either the United States (your home country) or in Japan. Assume that the exchange rate between the Japanese yen and the U.S. dollar is ¥120 = +1. Assume the interest rate in the United States on a one-year government bond is 5 percent and the interest in Japan on a one-year government bond is 3 percent.

a. If the exchange rate is expected to still be ¥120 = +1 one year from now, calculate the dollar amount you will receive from investing in the United States and the dollar amount you will receive from investing in Japan. Assume that you don’t have to pay a bank or broker anything to exchange dollars for yen. In which country’s bonds would you invest?

b. Now suppose that you expect the exchange rate to change to ¥110 = +1 one year from now. Calculate the dollar amount you will receive from investing in the United States and the dollar amount you will receive from investing in Japan. In which country’s bonds would you invest?

c. Based on your calculations in parts (a) and (b), should you always invest in a bond that has the highest interest rate? Briefly explain.