9.Suppose you are a Dutch investor,who wants a safe investment in terms of Guilders.You are investing for one year and the interest rate on a one-year Netherlands government bond is 6%and at the same time it is 9%on a U.S.government bond.The exchange rate is currently 2.05 Guilders to the dollar.Suppose you invest $1,000 in a U.S.bond.Also suppose a year from now that the Guilder/dollar exchange rate is 2.15 Guilders to the dollar.What will be the realized Dutch rate of return on the U.S.bond? Answer:Dutch realized rate of return $1090 x Future Guilder price of dollar-2050 2050 =S1090x2.15-2050 2050 =14.32% 10.Refer to Question 9.What does the exchange rate have to be at year's end for the Dutch investor to earn exactly 12%per year on the investment in U.S.bonds? Answer:Dutch rate of return $1090 x Future Guilder price of dollar-2050 2050 0.12 $1090 x Guilder price-2050 2050 Future price of Guilder =2.11 Guilder per dollar 11.Distinguish between nominal interest rates and real interest rates. Answer:The nominal interest rate is the promised amount of money you receive per unit you lend. The real rate of return is the nominal interest rate you earn corrected for the change in purchasing power of money.A nominal interest rate is denominated in units of some currency;a real interest rate is denominated in units of some commodity or basket of goods and services (commonly,whatever basket is used to compute the CPl). 12.Discuss the costs associated with trading stocks and why index funds provide a low-cost advantage. Answer:Costs can come in the form of: 1.the fund's expense ratio (which includes advisory fees,distribution charges, and operating expenses). 2.Portfolio transaction costs (brokerage and after trading costs) One of the prime advantages of an index fund should be its low cost.An index fund should pay only minimal advisory fees,keep operating expenses at the lowest possible level,and should keep portfolio transaction costs at minimal levels. 2-162-16 9. Suppose you are a Dutch investor, who wants a safe investment in terms of Guilders. You are investing for one year and the interest rate on a one-year Netherlands government bond is 6% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 2.05 Guilders to the dollar. Suppose you invest $1,000 in a U.S. bond. Also suppose a year from now that the Guilder/dollar exchange rate is 2.15 Guilders to the dollar. What will be the realized Dutch rate of return on the U.S. bond? Answer: Dutch realized rate of return = $1090 x Future Guilder price of dollar – 2050 2050 = $1090 x 2.15 – 2050 2050 = 14.32% 10. Refer to Question 9. What does the exchange rate have to be at year’s end for the Dutch investor to earn exactly 12% per year on the investment in U.S. bonds? Answer: Dutch rate of return = $1090 x Future Guilder price of dollar – 2050 2050 0.12 = $1090 x Guilder price – 2050 2050 Future price of Guilder = 2.11 Guilder per dollar 11. Distinguish between nominal interest rates and real interest rates. Answer: The nominal interest rate is the promised amount of money you receive per unit you lend. The real rate of return is the nominal interest rate you earn corrected for the change in purchasing power of money. A nominal interest rate is denominated in units of some currency; a real interest rate is denominated in units of some commodity or basket of goods and services (commonly, whatever basket is used to compute the CPI). 12. Discuss the costs associated with trading stocks and why index funds provide a low-cost advantage. Answer: Costs can come in the form of: 1. the fund’s expense ratio (which includes advisory fees, distribution charges, and operating expenses). 2. Portfolio transaction costs (brokerage and after trading costs). One of the prime advantages of an index fund should be its low cost. An index fund should pay only minimal advisory fees, keep operating expenses at the lowest possible level, and should keep portfolio transaction costs at minimal levels