Solution:

			Computation of
Effective Financing Rate		Probability	Expected Value
(1.07)( .98) - 1	= 4.86%	10%	.486%
(1.07)(1.03) - 1	= 10.21%	50%	5.105%
(1.07)(1.06) - 1	= 13.42%	40%	5.368%
			10.959%

PTS: 1

10. The effective financing rate:

a.	adjusts the nominal interest rate for inflation over the period of concern.
b.	adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern.
c.	adjusts the nominal rate for a change in foreign interest rates over the period of concern.
d.	adjusts the nominal rate for the forward discount (or premium) over the period of concern.

ANS: B PTS: 1

11. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

a.	less than the domestic interest rate.
b.	greater than the domestic interest rate.
c.	equal to the domestic interest rate.
d.	greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

ANS: C PTS: 1

12. If interest rate parity exists, transactions costs are zero, and the forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency:

a.	would be equal to the U.S. interest rate.
b.	would be less than the U.S. interest rate.
c.	would be more than the U.S. financing rate.
d.	would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium.

ANS: A PTS: 1

13. Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:

a.	on average, the foreign effective financing rate is greater than the domestic interest rate.
b.	on average, the foreign effective financing rate is less than the domestic rate.
c.	the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium.
d.	the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount.

ANS: A PTS: 1

14. Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound's spot rate is $2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan?

a.	about 12.4%.
b.	about 7.1%.
c.	about 13.5%.
d.	about 10.3%.
e.	about 11.3%.

ANS: E

SOLUTION:
	Effective financing rate = (1 + 6%)(1 + 5.1%) - 1 = 11.4%

PTS: 1

15. The variance in financing costs over time is ____ for foreign financing than domestic financing. The variance when financing with foreign currencies is lower when those currencies exhibit ____ correlations, assuming the firm has no other business in those currencies.

a.	lower; low
b.	lower; high
c.	higher; high
d.	higher; low

ANS: D PTS: 1

16. Euronotes are underwritten by:

a.	European central banks.
b.	commercial banks.
c.	the International Monetary Fund.
d.	the Federal Reserve System.

ANS: B PTS: 1

17. Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?

a.	about -1.7%.
b.	about 0.0%.
c.	about 14.7%.
d.	about 15.4%.
e.	about 8.3%.

ANS: A

SOLUTION:
	Effective financing rate = (1 + 6.5%)[1 + (-7.7%)] - 1 = about -1.7%

PTS: 1

18. A negative effective financing rate for a U.S. firm implies that the firm:

a.	will incur a loss on the project financed with the funds.
b.	paid more interest on the funds than what it would have paid if it had borrowed dollars.
c.	will be unable to repay the loan.
d.	none of the above

ANS: D PTS: 1

19. A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:

a.	equal to the U.S. interest rate.
b.	less than the U.S. interest rate, but more than the Swiss interest rate.
c.	equal to the Swiss interest rate.
d.	less than the Swiss interest rate.
e.	more than the U.S. interest rate.

ANS: C PTS: 1

20. Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these countries financed with U.S. dollars during this period (even when they had no receivables in dollars), their effective financing rate would have been:

a.	negative.
b.	zero.
c.	positive, but lower than the interest rate of their respective countries.
d.	higher than the interest rate of their respective countries.

ANS: D PTS: 1

21. ____ typically have maturities of less than one year.

a.	Eurobonds
b.	Euro-commercial paper
c.	Euronotes
d.	ADRs

ANS: B PTS: 1

22. MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.

a.	payables; euros
b.	receivables; euros
c.	payables; dollars
d.	receivables; dollars

ANS: B PTS: 1

23. Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $____, and $____ are needed to repay the loan.

a.	375,000; 449,400
b.	449,400; 375,000
c.	6,000,000; 5,357,143
d.	5,357,143; 6,000,000

ANS: A

SOLUTION:	MYR1,500,000 ´ $.25 = $375,000
	(MYR1,500,000 ´ 1.07) ´ $.28 = $449,400

PTS: 1

24. Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

a.	37.8%.
b.	51.43%.
c.	-25.8%.
d.	-6%.
e.	none of the above

ANS: C

SOLUTION:	Depreciation of dinar: $.0035/$.005 - 1 = -30%
	Effective financing rate: (1.06) ´ [1 + (-30%)] - 1 = -25.80%.

PTS: 1

25. ____ are free of default risk.

a.	Euronotes
b.	Eurobonds
c.	Euro-commercial paper
d.	None of the above

ANS: D PTS: 1