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

Question

Quizplus · Accepted Answer

The effective financing rate is the interest rate plus the expected depreciation of the currency. In this case, the interest rate is 4 percent and the expected depreciation is 2 percent, so the effective financing rate is 4 percent + 2 percent = 6 percent.