Deck 20: Short-Term Financing

Question 1

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

A) about 1.7%.
B) about 0.0%.
C) about 14.7%.
D) about 15.4%.
E) about 8.3%.

Answer 1

A

Question 2

When a U.S.firm borrows a foreign currency and has no offsetting position in this currency,it will incur an effective financing rate that is always above the __________ if the currency __________.

A) foreign currency's interest rate;appreciates
B) foreign currency's interest rate;depreciates
C) domestic interest rate;depreciates
D) domestic interest rate;appreciates

Answer 2

A

Question 3

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 nonU.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.

Answer 3

D

Question 4

If a firm repeatedly borrows a foreign currency portfolio,the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are __________ and the individual variability of each currency is _________.

A) high;low
B) high;high
C) low;low
D) low;high

Question 5

A risk-averse firm would prefer to borrow __________ when the expected financing costs are similar in a foreign country as in the local country.

A) locally
B) in the foreign country
C) either A or B
D) part of the funds locally, and part from the foreign country

Question 6

Assume the annual British interest rate is above the annual U.S.interest rate.  Also assume the pound's forward rate of $1.75 equals the pound's spot rate.  Given this information,interest rate parity __________ exist,and the U.S.firm __________ lock in a lower financing cost by borrowing pounds for one year.

A) does;could
B) does;could not
C) does not;could not
D) does not;could

Question 7

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.

Question 8

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

Question 9

A firm forecasts the euro's value as follows for the next year:
Possible
Percentage Change Probability
-2% 10%
  3% 50%
  6% 40%
The annual interest rate on euro is 7%.  The expected value of the effective financing rate from a U.S.firm's perspective is about:

A) 8.436%.
B) 10.959%.
C) 11.112%.
D) 11.541%.

Question 10

The effective financing rate:
A) adjusts the nominal interest rate for inflation over the period of concern.

A) adjusts the nominal rate for the forward discount (or premium) 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.

Question 11

Assume the U.S.oneyear interest rate is 8%,and the British oneyear interest rate is 6%.  The oneyear 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 oneyear,uncovered British loan

A) about 12.4%.
B) about 7.1%.
C) about 13.5%.
D) about 10.3%.
E) about 11.3%.

Question 12

Euronotes are underwritten by:

A) European central banks.
B) commercial banks.
C) the International Monetary Fund.
D) the Federal Reserve System.

Question 13

Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%.  If euros are borrowed by a U.S.firm,they would have to _________ against the dollar by __________ in order to have the same effective financing rate from borrowing dollars.

A) depreciate;about 3.74%
B) appreciate;about 3.74%
C) appreciate;about 4.53%
D) depreciate;about 4.53%

Question 14

Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar.  From a U.S.perspective,the effective financing rate from borrowing francs is:

A) 8%.
B) 14.48%.
C) 2%.
D) 1.52%.

Question 15

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

Question 16

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.

Question 17

MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they:

A) have future cash inflows in that foreign currency.
B) have future cash outflows in that foreign currency.
C) have offsetting future cash inflows and outflows in that foreign currency.
D) have no other cash flows in that foreign currency.

Question 18

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.

Question 19

A U.S.firm plans to borrow Swiss francs today for a oneyear 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.oneyear 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.

Question 20

A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:

A) borrowing domestically.
B) borrowing a portfolio of foreign currencies that are not highly correlated.
C) borrowing a portfolio of foreign currencies that are highly correlated.
D) borrowing two foreign currencies that are negatively correlated.

Question 21

Assume a U.S.-based MNC is borrowing Romanian leu (ROL)at an interest rate of 8% for one year.Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010.The expected spot rate of the leu one-year from now is $.00011.What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis

A) about 10%.
B) about -10%.
C) about -1%.
D) about -2%.
E) none of the above

Question 22

Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.

Question 23

What is the expected financing rate of the portfolio contemplated by Cameron Corporation

A) 3.10%.
B) 1.90%.
C) 17.00%.
D) 13.00%.
E) none of the above

Question 24

Assume that interest rate parity holds between the U.S.and Cyprus.The U.S.one-year interest rate is 7% and the Cyprus one-year interest rate is 6%.What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward

A) 6%.
B) 7%.
C) 1%.
D) cannot answer without more information

Question 25

The interest rate of euronotes is based on the T-bill rate.

Question 26

Morton Company obtains a one-year loan of 2,000,000 Sudanese dinar (SDD)at an interest rate of 6%.At the time the loan is extended,the spot rate of the dinar is $.005.If the spot rate of the dinar at maturity of the loan is $.0035,what is the effective financing rate of borrowing dinar

A) 37.8%.
B) 51.43%.
C) -25.8%.
D) -6%.
E) none of the above

Question 27

What is the expected standard deviation of the portfolio contemplated by Cameron

A) 2.24%.
B) 14.98%.
C) 2.89%.
D) 17.00%.
E) none of the above

Question 28

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:
Percentage Change Probability of Occurrence
-5% 20%
-3% 50%
1% 30%
If the Russian interest rate is 30%,the expected cost of financing a one-year loan in rubles is:

A) 27.14%.
B) 32.86%.
C) 26.10%.
D) none of the above

Question 29

If all currencies in a financing portfolio are not correlated with each other,financing with such a portfolio would not be very different from financing with a single foreign currency.

Question 30

What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate

A) 12%.
B) 30%.
C) 100%.
D) 0%.
E) none of the above

Question 31

____________ are free of default risk.

A) Euronotes
B) Eurobonds
C) Euro-commercial paper
D) None of the above

Question 32

What is the expected effective financing rate of the portfolio Martha is contemplating (assume the two currencies move independently from one another)

A) 9.03%.
B) 7.00%.
C) 10.00%.
D) 7.59%.
E) none of the above

Question 33

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

Question 34

One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.

Question 35

Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR)with typical maturities of one,three,and six months.

Question 36

If interest rate parity exists,financing with a foreign currency may still be feasible,but it would have to be conducted on an uncovered basis (i.e.,without use of a forward hedge).

Question 37

___________ typically have maturities of less than one year.

A) Eurobonds
B) Euro-commercial paper
C) Euronotes
D) ADRs

Question 38

A negative effective financing rate implies that the U.S.firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.

Question 39

Assume a U.S.-based MNC is borrowing Romanian leu (ROL)at an interest rate of 8% for one year.Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010.The expected spot rate of the leu one-year from now is $.00011.What is the effective financing rate for the MNC assuming it borrows leu on a covered basis

A) 10%.
B) -10%.
C) -1%.
D) 1%.
E) none of the above

Question 40

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

A) payables;dinars
B) receivables;dinars
C) payables;dollars
D) receivables;dollars

Question 41

Kushter Inc.would like to finance in euros.European interest rates are currently 4%,and the euro is expected to depreciate by 2% over the next year.What is Kushter's effective financing rate next year

A) 1.92%
B) 2.00%
C) 6.08%
D) none of the above

Question 42

Assume the U.S.financing rate is 10 percent and that the financing rate in Germany is 9 percent.An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ___________.

A) appreciate by 0.92%.
B) depreciate by 0.92%.
C) appreciate by 1.00%.
D) depreciate by 1.00%.

Question 43

If interest rate parity exists,and the forward rate is an accurate estimator of the future spot rate,the foreign financing rate will be ____________ the home financing rate.

A) lower than
B) greater than
C) similar to
D) none of the above

Question 44

If interest rate parity exists,the attempt to finance with a foreign currency while covering the position to avoid exchang rate risk will result in an effective financing rate that is _________ the domestic interest rate.

A) lower than
B) greater than
C) similar to
D) none of the above

Question 45

A negative effective financing rate indicates that an MNC:

A) paid only a small amount in interested over and above the amount borrowed.
B) has been negatively affected by a large appreciation of the foreign currency.
C) actually paid fewer dollars to repay the loan than it borrowed.
D) would have been better off borrowing in the U.S.

Question 46

The degree of volatility of financing with a currency portfolio depends on only the standard deviations of effective financing rates of the individual currencies within the portfolio.

Question 47

Countries with a _______ rate of inflation tend to have a ______ interest rate.

A) high;low
B) low;high
C) high;high
D) A and B are correct

Question 48

Foreign financing costs in a single foreign currency ____________ financing costs in dollars,and the variance of foreign financing costs over time is ___________ than the variance of financing in dollars.

A) are higher than;higher than
B) can be lower or higher than;higher than
C) can be lower or higher than;lower than
D) are lower than;higher than