If Interest Rate Parity Exists and Transactions Costs Are Zero

question 8

Multiple Choice

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.

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Definitions:

Original Cost

The purchase price of an asset or investment, including all expenses incurred to get the asset ready for its intended use.

Balance Sheet

A financial statement that summarizes a company’s assets, liabilities, and shareholders' equity at a specific point in time.

Pay Period

The interval of time for which employee wages are calculated and paid, such as weekly, biweekly, monthly.

Dorsiflexion

The backward bending or lifting of the foot at the ankle, moving the toes closer to the shin.