QUESTION 13.5 An investor in London has two investment opportunities. They can invest in two-year UK government bonds with an annual nominal interest rate of 4.5%, or they can invest in two-year US government bonds with an annual nominal interest rate of 2.6%. Currently the spot exchange rate is 1.8 US dollar/UK pound, and the two-year forward exchange rate is 1.7 US dollar/UK pound.

13.5A Should the investor hold their money in UK or US government bonds? 13.5B Does the covered interest parity hold? Do you think this situation will exist for a long time?