Chapter 6 Module (4): 10 mark:s As a Canadian Saver, you have $50,000 to invest in either of the three investments described below. The world risk-free rate is 3%. There is no risk-premium on the Canadian bond but a Brasilian bond has a risk-premium of 4%. The current nominal Cad-Brasilian exchange rate is ecAD 0.7 (Reals per Cad dollar). Before the pay-out next period, you expect the Real to depreciate relative to the Cad$ to a new nominal exchange rate, efuture 0.79. Your third alternative is to buy a condo in Florida. The current nominal Cad-US exchange rate is eCAD = 0.75 ($US per Cad dollar). You expect the condo to increase in resale value by 10% but you also forecast the exchange rate to rise to eCAD 0.80. Based on your forecast, what is the expected rate of return (% yield) on each investment (correct to one decimal place is fine)? For simplicity assume zero transaction costs. % return on Cad Bond: % return on Brasilian Bond: % return on Florida Condo: Show work below: BONUS QUESTION (5 marks, up to a maximum of 30/30): Draw the yield curve described as follows: Interest rates: 3% in year 1, 2.5% in year 2, 1.25% in year 3, 0.25% in year 4 Term premiums: 0.5% for a one-year bond, rising by 0.25% for each additional year of maturity. 4 2 3 4 5 Mark the axes above clearly indicating what the axes measure and what the exact value of the important points are. The yield curve above suggests which of the following is the predominant short to medium-term economic outlook among market participants? (circle the one you think is most appropriate) strong recovery, weak recovery, stable growth, recession