A U.S. company purchases a 90-day certificate of deposit from a Singapore bank o

Question

A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15, when the spot rate is $0.72/S$. The certificate has a face value of S$1,000,000 and pays interest at an annual rate of 3 percent. On August 13, the certificate of deposit matures and the company receives principal and interest of S$1,007,500. The spot rate on August 13 is $0.69/S$. The average spot rate for the period May 15 – August 13 is $0.70/S$. The company’s accounting year ends December 31. Interest income on the investment is reported at:

A. $7,500

B. $5,400

C. $5,250

D. $5,175

Explanation / Answer

Interest Income on the Investment at maturity date = Maturity Value - Face Value = S$1,007,500 - S$1,000,000 = S$7,500

Since the Interest is received by thh US Company on the maturity date, the rate will be the spot rate on the matuirity date..

Interest Income on the Investment is reported at = 7,500 * 0.69 Spot Rate on Aug 13 = $5,175

Hence, the correct option is $5,175

Note --- Understanding of Exchange Rate

Spot Rate on August 13 is $0.69 / S$

It means 1 Singapore Dollar can be purchased by paying $0.69..

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