Which of the Following Can Be a Possible Effect on a Borrowing

question 52

Multiple Choice

Which of the following can be a possible effect on a borrowing nation if the real interest rate on the loans rises?

• A)The fixed costs of nonrepayment can increase
• B)There will be a higher incentive to default
• C)a default imposes a smaller penalty on the borrower
• D)A default imposes a bigger penalty on the borrower

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Definitions:

Financial Liability

Any liability that is a contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or a contract that may be settled in the entity’s own equity instruments and is a non-derivative for which the entity may be obliged to deliver a variable number of the entity’s own equity instruments, or a derivative that may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, rights, options, or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options, or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments.

Contractual Right

A legally enforceable claim that arises out of a contract, allowing the holder to demand performance or compensation.

AASB 132

The Australian Accounting Standards Board standard relating to financial instruments, covering the presentation, classification, and disclosures of financial instruments.

Financial Asset

An asset that derives value from a contractual claim, such as bank deposits, bonds, stocks, and derivatives.