Question

If Japanese investor want to buy U.S. bond, what would be their rate of return in a year? (Hint: ultimate goal of investment is for consumption. For Japanese, they have to convert their dollar investment back to Japanese yen to consume.)

Answer 1

If the Japanese investor wants to buy United State bond, it would be appropriate to assume that he is investing into a US Treasury bond which is of short term nature and backed by US government.

The volatility in the market which is due to the corona virus pandemic, the return on US treasuries which are of short term in nature would be on the higher side as there is an expectation of uncertainty so the return on investment in US treasuries would be on the higher side.

But since he is a Japanese investor, the value of dollar in such scenario when there is a lot of uncertainty grows at a substantial pace and it appreciate against other currencies so his return would be maximized to a greater extent by the depreciation in the value of Japanese currency against appreciation in the value of dollar.So,when he converts his gains , it will magnify due to appreciation in currency value of dollars