Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.

Question

Quizplus · Accepted Answer

This statement is false. The financing costs of a foreign bond can be higher than the financing rate of a domestic bond if the currency depreciates to a large extent over the lifetime of the bond. This is because the depreciation of the foreign currency will increase the effective cost of borrowing in the foreign currency, even if the interest rate is higher. Therefore, it is important to consider both the interest rate differential and the potential fluctuations in exchange rates when evaluating the financing costs of foreign bonds.

Even If the Interest Rate Associated with a Foreign Country