Assume That Instead of Investing in Euro Bonds at a Fixed

Multiple Choice

Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. Assume both interest and principal will be reinvested in six months. Assume the exchange rate remains at €1.75/$ at the end of the year. What should be the LIBOR rates in six months in order for the bank to earn a 1 percent spread?

A) 5.25 percent.
B) 5.48 percent.
C) 5.76 percent.
D) 5.86 percent.
E) 5.94 percent.