A Canadian investor purchases a US dollar-denominated bond. If the Canadian dollar strengthens against the US dollar, what impact will this likely have on the investor's return in Canadian dollar terms?

Question: A Canadian investor purchases a US dollar-denominated bond. If the Canadian dollar strengthens against the US dollar, what impact will this likely have on the investor's return in Canadian dollar terms?

Answer options:

• It will increase the return. ✅ It will decrease the return.
• It will have no impact on the return.
• It will only impact the interest payments, not the principal.

Correct answer: It will decrease the return.

Explanation: If the Canadian dollar strengthens, it means it takes fewer Canadian dollars to buy one US dollar. When the US dollar-denominated bond's proceeds (interest and principal) are converted back to Canadian dollars, the investor will receive fewer Canadian dollars, thus decreasing their return.