Finance lecture 5.pptVIP

Copyright ? 2009 Pearson Addison-Wesley. All rights reserved. 17-* Interest Rate Differentials For many countries, the expected rates of return are not the same: R R*+(Ee –E)/E . Why? Default risk: The risk that the country’s borrowers will default on their loan repayments. Lenders therefore require a higher interest rate to compensate for this risk. Exchange rate risk:If there is a risk that a country’s currency will depreciate or be devalued, then domestic borrowers must pay a higher interest rate to compensate foreign lenders. Copyright ? 2009 Pearson Addison-Wesley. All rights reser