An investor is thinking of investing in one-year zero-coupon bonds. He is considering investing in either a New Zealand dollar-denominated-bond with a yield 3.25 percent or US dollar-denominated bond with a yield of 2.5 percent. The current exchange rate is US$ 0.6546 per NZ$.

1. What exchange rate one year later is the break-even exchange rate, which would make the NZ$ and US$ investments equally good? (2 marks)

Which investment would have turned out to be better if the actual exchange rate one year later is US$ 0.6052 per NZ$?