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FIN 4604: Sample Questions III

1). 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% e) 14%

2). Assume that the U.S. interest rate is 11% while the interest rate on euros 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; 3.74% b) Appreciate; 3.74% c) Appreciate; 4.53% d) Depreciate; 4.53%

3). When a U.S. firm borrows a foreign currency and has no offsetting
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e) The World Bank

12). Assume U.S. interest rate is 7.5%, New Zealand rate is 6.5%, the spot rate of the NZ$ is $.52, and the one-year forward rate of NZ$ is $.50. At the end of the year, the spot rate of NZ$ is $.48. Compute effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan? a) –1.7%. b) 0.0%. c) 14.7%. d) 15.4%. e) 8.3%.

13). 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. e) Paid back an amount less than originally borrowed

14). 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

15). 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

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