General Securities Representative (Series 7) Practice Exam

What occurs to yields when the US dollar is devalued?

1. Yields decrease

2. Yields go up

3. Yields fluctuate erratically

4. Yields remain constant

The correct answer is: Yields go up

When the US dollar is devalued, yields on US-denominated assets tend to increase. This is primarily because the purchasing power of the dollar decreases. As investors perceive that the return on their investments will be eroded by inflation, they will demand a higher yield to compensate for this increased risk. In essence, as the dollar weakens, foreign investors might become wary of holding US assets due to potential losses in value when converted back to their local currencies. This heightened demand for higher yields is to attract investors and offset the risk associated with currency depreciation. Additionally, when the value of the dollar falls, it can lead to higher import costs, which can further contribute to inflationary pressures. To keep up with inflation, interest rates may be pushed higher, resulting in elevated yields. Hence, the correct answer reflects the general market response to dollar devaluation and its impact on yields.