Test bank chapter 1 Introduction

Solution: Direct Loan Cost

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Test-Bank-Answers

Solution: Direct loan cost = (200,000 x 5) +[(1,000,000 x 5) - 4,000,000] = 2,000,000 Israel shekels
Solution: The credit swap is better because it is cheaper and has no exchange risk.

Solution: Direct Loan Cost Credit Swap Cost

200,000y + (1,000,000y - 4,000,000) = 200,000y + 400,000

y = 4.4
22. A multinational company believes that the exchange rate at the maturity date of the loan is 5 Israel shekels per dollar. If the company's prediction proves correct, which alternative is cheaper?

A. direct loan

* B. credit swap

C. equally expensive

D. cannot tell

E. all of the above

Solution:

Direct loan cost = (200,000 x 5) +[(1,000,000 x 5) - 4,000,000] = 2,000,000 Israel shekels

Credit swap cost = 200,000 x 5 + 400,000 = 1,400,000 Israel shekels
23. If market analysts predict that the exchange rate will be 5 Israel shekels per dollar at the maturity of the loan, which alternative would rational decision-makers recommend?

A. direct loan for sure

* B. credit swap for sure

C. cannot tell

D. all of the above

E. none of the above

Solution: The credit swap is better because it is cheaper and has no exchange risk.

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