CHAPTER 2 lnstitutions, Securities, Morkers, ond Rotes 35

Ihe 0perurion ol tk lloney ilcrkel

The money market is not an actual organization housed in socre central location.
How, then, are suppliers and demanders of short-term fuads hrought together?
T.".-picall".-, they are matched through the facilines of large New York banks and
tirrougn government securities cieaiers. A number of srock brokerage firms pur-
chase various money market instruments for resalc to cusiomers. In addition,
iinancial institutions such as banks and mutual funds purchase money markei
LltSLf uLucll{,5 tur urcrr PorLrurrus tu Pruvruc aLLracttvr lrtul ils ult Llrcil uuslurrlcl}
deposis and share purchases. Additionally, the Federal Reserve banks become
iavolved il the money market but only in loans from one commercial bank to
$ede:al iqrnds another; these loans are referred to as traosafiions ia federal fuirds.
XIE
Loon lromnrlion htyeefl (c{nmerdci Regardless of whether a business or goveflirne*t is issuing a money market
bonks in whkh the Federol RmErve
instrument {demanding short.te.rm fuads) or purcbasing a money market instm-
bonkr betome involvd. .,^-',,
-- /^,.-^1..:-- ^L^* '^-* ,,.-J^\
ruru)l, J:-^^.1,. -^
ruuDL 5u uulllr} ^-^+L^* PdrL)
lrrErrL
-^ \JuPPry1116 )rlurL-rLrru urrL Pall) Lv 4uvLrlEr
or use arr intermediary, such as banks or brokerage firrns, to make a transaction.
The secondary (or resale) market for marketable securiries is no different from
the primary (or initial issue) rnarket with respect to the basic transactions that
.,_ .it.)IS. thev are made.
1-: :J .1, iVhiCh Individuals participate in the money market as purchasers and as seilers oI
'ilSr -i. Of money market instruments. Because the instruments are typically tra<ied in
denominations of $100,000 or more, banks and stock brokerage firms will
*break down" marketable securities to make them available in smaller denomi-
aations. Individuais seli marketable secudties in the money market to liquidate
the secu.rities before maturiry. Individuals do not issue marketable securities.
: : :r. capitai Business firms, governments, and financial institutions both buy and seil
:- - .-:r: qa!-tlial marketable securities. They may be the primary issuers, or they may sell securi-
'
,.. --... -1, -..,
r,-'r\L!,i,
ilint Remember thot the rnoney ties that they have purchased from others. Of course, each of these parties can
. :\it:. and
fiffiI?, E rEt !ffi-Frln rg&{ta'q issur oniy certain money market insrrurnents; a business firm, for exampie,
ond is reprecnd h {s$e** &dfriii€s
L4Mlul i--,-- -d Ir
IDJUL
( 'r----,;--,
U.J. rrc4'By L-:ll c^-i r:*^--:^l rltSLrLULrVrtt
UrU. JUIUEI trtl4rtLrdt
:--.:--,*:^-.. -,,-^L^-^ urdr-*^-
I *-, ,lnii ondrp&rss$cd::k eqifd PUALU4JL

aoriaiis io* &rry-re* iuno-raisrng

ketahlc secrrriries speciiically fo,: resale, whereas r-rrhers purchase them as short-
._- !\/LL,\r ^-i L .^{k^l L,, i^^. r^*ilr uEu'
e, p,a-rai
i^Lr qilu
--r ferrTr irrvFst.meJrrs Br-rsintsscs arlrj g(-lvfrflmcnis n,.rr,-:hasc ma.fi.-cta'Lrjr ser:rr1jlia5 rr-r
i ur

: -.::-inl. equity on the boicme sheet. earn a return on temporarily idle funds.

Ik Eurocurrensy Horlet
TL^ :-,^---r:^-^!
I lrc rutgrHaLruuar ^-.-:,.^l^--
gqurYatclrl ^4 -L^ l^-^--: --!-^-
lrl4lKcI :^ Ldr:su
15 ^^lt^l -L^
lrlc
ul Lxc ut tucSrlL rttuLcy -
, ,-:' a,i:illc Surocurrency rncrket Eurocurrency market. This is a market for short-term bank deposits denominat-
eci rn U.S. <ioilars or orher easiiy convertrbie currencres. Historicaiiy, the
r_1. iniemoiionoi equiwieni oi iie domesik
i:: r I1C
-.!t.r)..1ttu
-rt -,- --f, Eurocurrency market has been centered in Loncion, but it has evoived into a
: I l.; in _(illlle Iarge, truly global market.
:: li!1ti'idil- E,::cc,;rrenc;' depcsits grise .,^,,hen : csrpcradcn or indi','idual rn,,-L-es a b,enk
: . l: :,::1 +i deposir iii a ciir-reiici- other ihan rhe locai currenc;v oi rhe coi;nrr7 whe,-e rhe bank
- -:-, :: ahese is located. If, for exarnple,.a muldnational corporation were to deposit U.S. dol-
!--^ :- - rLofiGon
^..-r^- L--r- ,t .!^!!^- ,!--^-:- ,'^ J^l!^- r
iar-s in a Daiii<, ifus woiiid cieate a ijiir-rGoilai oeFosii ia ooiiar oeposii ai
. k,--6
a bank ia Europe). Aimosr ali Eurodollar lepnsirs are ii?fle deposiis, meaning
-' - "'-5u- rhat the bank wouid promise to repay rhe deposit, with interesq at a fixeci <iate in
, -::-iilcial the future*say, 5 months. During the&terim, the bank is free to lend this dollar
:. .: r.. deposit to creditworthy corporate ,r government borrowers. If the bank cannot

-)
 a0 PART I lntroduction to lvlonogeriol Finonce

'E|t*!lElcL
Boad rypc

,ln.ard e-!

Dcbeaaris t

$uberdiszi€d
&bcamres

Irrom_e boaat

$ecured Bor&
Mor4age bonds

Collreral trust
boads
s

ir!.ffi€ bsr&
Equipnent rust Ii
and income bonds-are unsecured, whereas the Iast three-mortgage bonds, col- ccrtfietcs a
St I*2J- Iateral trust bonds, and equipment trust cerdficates-are secured' I
b.{r& Table 2.4 describes the key characeristics of fi'''e contemporary types cf i
!
E}* LJ.
bon<is-zero (or low) coupor bonds, iunk b9 nds, floatilg-rate bonds, exendible t
g-: l.-J-
-:tr4-l
ffis u@ gEt aotes, an<i puiable bonds. These bonds can be eiiirer unsecured or secureci. In ,
5r lia!2J. recent i/ears, changing capital ma:ket ccndiions and inl'estor prefeiences' along r
€+JiFalerE ;t€ cc*6.-crtr .*rith corporate financing neeis, ha','e spurred ieveicprnent of innovations in
5c.f&23. bond financing and will likely continue to do so.
zso {or kry! co*Aan bo**
Seeldtl{. r-r-- r!
--t h-
--l r
inierF{itonm ito-lg l5IBet
iu*k bo*&
SaaTdb 2.1. Companies an<i governmenrs borrow internationaiiy by issuing bonris in two
6oreign i:onc
*oding-t"* b.c& prhcipal fiaaacial markets: the Euro'uond arrd the foreign irond. Both oi these Abordisudmole*r:L
hidlB?.{. providc crcditworth-y borroir-crs the opportunit-y to obtair: large arlou,:ts ul ddm !et.i+dpt=::.:":st
exgdiHerc*s long-term debt financing quickly, in their choice of currency and with flexible eq.!cieaga*r:.
Seldle ?.1. rcpa\ment terms.
arrrriria lnrrit A Ego'bo:!d. is issueci b,v an hternationa! bcrrower and scid to in..'esiors in
Soe Tobh 14. coulries r*ith currencies other than the currency in which the bond is denomi
nared. in exampie'+'o,:ld be a rioiiar-denominated bond issued b,. a U.S. corlic-
radoc and soid to Belgian investors- Frcm the foun<irng of the Eurobond market
E:rrebend in iie 1r6a$ unci rhe Bid-198(is, "-blue chip' U.S. coiporations rrere'"he laigest
Abod issred fo on irleroofimd bil-
rowl od dd h invdors in csc#i6 single class of Eurobond issuers. Maoy of these companies were able to borrow
rfihsrrs{k oltarlfion tlru olrrartq in rhis marker ar iarerest rates below those the U"S. government paid oa Treasury
*nrfiirhfubqd hdcnqdmld. bon& it issued -{s the market matured, issuers became abie to choose the cur-
 -1

CIIAPTER 2 instih.*ions, Secl_rriiies, i4orkeh. cnd Rsk: ,l

ffi ehera#nsEc-. cr.J Ho,r+., # Lender,s cirrim #Tiediiionoi Ty-ms o{ Bontis

Bond ry,pr Chraseri:Ccs
> Prioriry of leader's claim
L i-ie,ee+g+d Bs:*
Debenarres Ursq*ed bcrds tar oni.v creditworhv Claims are the same as those of any genarai crediror-
.i,-:u car :sg:: (lnre;tblc ' Lave cdrer unsecured bonds Mav
"^'-'
bonds ae io air.r,
eortati Lic'r,carures. "oUoJnn."a
$rJbo1riiners6 Ciaims ue noi udsfied until iho* of
cbbmrures *---;.---,: :. ceCau (sednr
':- 'lx.t;J; uuiumg
Cl";m is tirat of a general
s+nior debt ciaim.
retiitor but ofi as g$c{i is a
i<ba h:vr bctr f.rii,v sarisfied.
Irrome bcads I :.-=: :i:,1rcr:: requre! ctl; rha, Cai:l is dxr of a ganerai creriiror. Are uot rn
3arnilrs are arzihble- Commody deiaulr whe::
lDrsest paJ.rrrcrB a:e mjssed, i:tcaust tlrev xe
rsrei h rcorg,anizatian of a failiag condngmr onll. on e-:mingi |xmg,raiia*e.
lL-E- .

Sectred Bonis
Mon3:ge'oonris Serryed b,. resl es,rge +r buiidmip
Ciall t on prrrecis ircm saie cri mortgaged assers; il nat
i:jiy satisfiod, ri: lenciqr bccomcs a gcaeral sedir+r.
hc f;*-tnartg64e claim rnust be fi:iiy sat sficd beiorc
di sribuoon of procttd s ro e. od d fl
ot1 Fag( hold;
s -

ar:d so or:. A numbs of rnortgagcs can L,e lssucC

aga$sa the s,ne collatra].
C.ouateral rust Secure{ by $6qk aori 1or} boods ttrat
hond: Ca.m u proceeds ftom srocli uC ror) kra .:rii:re;a!
;rc osrcd br rbc issus. Collarcral 91
if nor fiJiy- satisfied, rhe ierdcr becoax g"o"oi
--.-
r':iluc rs gm;raliy 1.5 ro J_l7o grearer
cred:ror- "
riran innd raiue .
!euiDrrent rust Used tc fu:.ancc -roliing;rx).'*
rtii. cc[- ceroitca rr Cleirn .is on procecds rrom rhe sale of the asset ii rrm:eJ.
-:!:l*.l=u--k-s_ t ,;lr_ i:ilr;.;.1 ;2,. ;^
:u ,,
r:J:., x=;ry
. i
^...^.--i--- .ifi,i.
"-i"i, CU$iaECini ijusi trrohqre jenOrS
i, rusrtc buys such aa as;et a:th Secorne gmera I credrtc,rs.
i;:ijr rasi rnrougir ri.:r-ir c.i rrus:
r; r Jihile rmfir:rs acd tjreu le*ses ir tc rhr
,,.- .,.^.-t :. i;r:
-;--_-._-
Iil :Jr ..lx,:
--.i. =i:::-h
s.beorlei iear paynen;. rrcerv:s
]..:r,]rr< tiir ro tic ascl A r)"pf, ri ]castr,q
.- ai iil

rena\ In '.arhirh rne. borl.r.r.-,-r-. a.:d !::rn-..2r .-..r I .-.." . _..... r....
i .,.ii;; uirur. ir-r il,urr rcucrrr velrr r;;;;;;;c';-rJ;;;';;;;;;*".
Jr.l"J";l
rri r3n!1s or rhe
ii*Ti of boirora'e-r-s" rotai i.sut l'oiufle. anci
: :,i'o :r:1Tr'j
Ur-:ilmtnefll)il
currenc' oi
foreicn bond
i nlike a Eur':bonci, a {orersn bond is issued il; a hosr countrr,'s
i hrui issueo in c h04i (orntr!.: {inoi.
i,.:-".:'. ,: fhe hCst CUuji.ir..,.; .Uiic'C-i, b. financial
trni rnorlrl, c !!:r is:i:pJlry,r:Ji , fr,.;*,; ;.;;;;;.'; ;;r,...,
:-;\ible !sr3, ! trytilr nar.r:t3nci.ninared bond. is:led in Ger=mrnuth, ., .
i;-;;;;;;;'r;;;;ru#
Ey beii++.fi.
a iore sn b""d
ani rne i-initeC Siates.
"
;l;i.i, ;;;:;;;:
s -] .
ravarl\ rrrlz( ffi ;;;,
::--imi-
,----i-.--
,a!5LlL
:,llIOlV
:-{ vhar are rypical matu''es, denominarioos. ard inreresr Fa},menrs associ-
a.ted wirh a corpcrare bonrii Describ} the role
:.:.SUI-Y
the trustec.
oi rhe biii'rui*i*ru
:i aui- ^nl

p{i}eY ba}.?l*
I}e ttttnrpr by o ncrimon{gercil
group ic goin ,.;oriirol o{ th:
*".+ , i ,, !,.- t,, .^r.. , . -
nurnber oi prer.v v.;ler.
CFIAPTER 2 lnstitutions, Securities, Markets, ond Rqbs 4l
1
rir,rn,--ri prc:rre. i,.,r::-l sharehoiriers is ciosely corrtrolie.i by rire Securiries epd
Fx,:hangr C,:,r'-.is-sir..n- ro rrorect asainst oroxies beine soliCired on the hasis oi
n'rrileac.,-r.g . ,i.rrn-ition. Existitg rlsil.agenient generaily ieceives the stockhoiC-
-i: !:L,\i.!. b,e.;:usr. it is ahile to soliclt thern et cofiIpany- experlse.
(l----.-.r'.-r:ll'.': e--hen. the finn i," -l,i,le1y olvned, or-itsiders
!!i,y E'age a prox-y
barrie :.:, uns€at the exiscing managemcnt enci gain conEr{,"i. To rvin a corporaee
.-:-:r:,r. ',ores from a firaioriry of the shares votcd are required. Hor.rever, the
m:;;:- ,',ic. -;i a nonmanagenlent group winning a proxy j-ranle ari qenerallv siirn.
Divi*le*ds

The pavment of corporate rlividends is at the discrerion oi the board of dir:;rors.

-\lost ccrporaticns pey dividends qua:reriv. Divide.nds mrry be paid in cash"
stock, or merchandise. Cash dividerrds are the most corilmLrn; merihandise <iivi-
dends are the least collrmon. Coinmo;.i stcckhokiers are flot prornis,;d a clivicicn{,
l-ur tiley cofi1e to e-xfrect certain payments baseri on the hrstorical drviderrd :at-
iern of the firm" efore dividen,ils are paid to commot stockiroiders, lhe clainr:; oi
the gcvernment, all creditors, and preferred scoci<holders mlist be satisfie J.
Because of the irnportance of the dividend decision ao rhe growth a.nd valuatig;r
of the flrui, detaiie{i ciiscirssioa of ai,rcicnris is inciuci*.i in Chapier i:i.

lnlernstionoi Star* lsrues

Although the internationai .market lor common srock is ncrt as large as the intrr-
national market for cebt secnrities, cross-krorder trari ng and issualce of
commc,n stock ha1,e increased ciraniaticaliy in thc past j,0 years. Much of this
increase is due to a grcwing desire or: rhe parr of securities investors to iiiversify
their inlrsrrnent portliriios internarionally.
Toclav, scfiie coi'Diiiaiioiis iss#s stack in ftrelgn mdrkets. Fcr exanple. :;e."-
eral iop LI.S. muitinationa.l cornpanies have listed rheir stock i1 half a .loze6 or
rnore slLrck ;-earkets. li'ire L+n<iqr, Frankfln, arici f'ckyo markets are the mosr
ooirulai', Jssuint sior:i< inter,-,aiii;iiaily bo;h brcadciis ihc o-vvner:hip ba:c an<l
lr:,p: i Lr,!rif,.r,ti'ir, ;r,ii,gi-air'iii,lf ,;,;,^. ihl.iOc;i i.i.isincs.; sJfi.ii. A i,U,,,,n Un ,
ioreign stock .x{:hallge botii inereaser local brisiness press coversge and seives as
effective c{)ipcr.rre adve;:tisinf,, }la',rir:g k-rr:aiiy ryaricd stock ,:an ;rlsc, faci}itate
.oioor.lte accursiiions hecar:se slares can he used as afl accepfabie rnethod ot
niImcnt
Fureigir curporaiiuns havsais., ilisur,v..'.-s.i the l;rrici:i;:; .r{ iradi-ig ;l;eii ;tocl
in the United Stales. l"he dis,:iosLiri: anC reFil-r..i*g req:.:irements rnandated b;. rhe
r-i.S. Scc::lities *nd
-E..;chrnge Ccr,:-rr:ir-.n ha.re hist<;ricall;,. ,Jiscc.rL:rage<1 ali b,ut
'-he iargest toreign firms from direr:tly listing their shares on the New y.;rk or
A:rrericair stock Exciianges, roi e xampie , ii-, '!,993,I)ajmler-Beiiz i-;c;anic the fi.rsr

.Ayteriecri S*p*sitcry Receipi;

.ierse Gerrcan a.)mfar]- t,:oe iisrerj ,-rrr rhe tf-'rl5iii.
Akernatively. mcst {oreign conrpaties tap ihe u.s. rnarket thrt;rrgh Americag
iA hfl.:
Dr;-ru:iia.:v -91-r.-r:i:-'is {rt:Jll-s). Iljr:r *i*,--jaiili: issurC h-1. I j t h;r,!.-r ;-,.niciri:in:.
flrims lssued by lJ.S. bot!r-. represen!.
ovrnership of shares oia ft:reige ri-r!11panv's sror-:i. heiri on rlenoqji i:,,v iirc U.S"
ing o*aei:hir of shores ,f o foreign
r0mp0nfs 5is(i( ieiri on iieposit by ihe ba*k in rT:e iurcigrr rr-rarl:et- Bera,:se rilF. r.. isste<i, iii aliliar", h-1. a il,ii. i:aak
U.S. bank in tfie ioreign mrrket ond to u-s, investors, the-v are subject to u.ii. securit;rs lalvs :,et .sriil givc in\,restors the
i:isued in dolhrs to U.5. inyestors. opporruniq tc diversif their poi'tloiicis intern*rrriuailr..
 CHAflEP.5 Time Yoiue of Money t&i

:. jlSart!-a
;-r T-t'.'coes the tiaring of cash ifows have econorn;c conserlriences? Erirat is
a tiftx€ lifie,;rnci hor,ry- dors it Ceirict cash ilowsi
: 1 qi_,, : .1- |r(a | , f , 1
\rr'rraL i:' ..ilc uiilcrtrlruc tlcawccr luturt u{t!14€ arc! pTesent i,laiugi wiucir
approach is prcferred hy financial rnanagers? Ylhy?
rved dra- 5-3 i{".i..v are {inanci;:i tabies laid cut and accessed? Does an ablli*, ta soive
;r can rr-i.io*. ri.^--;^i .- ;^,,i-."^-
Lre
" rrr4rrL,n i L4!L Liid LrI -i.i-;i-^"
^- I J,
ur pii.iaj r,.-i^-...
^,-..^,...,-..^
ieL i LUiiLL -- i ng.,
i]ncCisi.iilii;
:or-is pre-
rosethat
rs orfiei
lai keys,
e -s 5.?
i4 Ix/. Imagiae thar at age 25 yilu beqin inaking ennual cash deposirs of $2,00r,,1 ir:ro a
nd ro:r,,- savings account thar pays 5 percent amual interest. Ar the end of 40 .vea-rs, ar age
rulared. 6-5, you "would have made deposits totaiing $90,000 (4rJ years x $J,*00 per
du*, are vear)- Assuming that you have made lo withdrawals, lr,.irat do yau rhink r,.our
: me&u- a-ccoriiit balance would be? $100,000? $150,000: ii200,00Ci lio" your. $g0,000
ipt-\ Y/Cu
wouici have Brolvll rc $24-i.i:00i lfiry? ltecause the time vaiue of firorrey aiiorveci
:bsh a
tte Cepr':,311: to r-.:ii. i:lieres;, ai:i.J intc.rrst on ini'ei-cs., ovci thc 4C i,cai-i.
re func-
rl caicr-
: --:.:::r:d ii:!e*s? The {ru*epf s{ F*turs Vrlue
-:
:rancial -+i:i
routine
errned or o givrn &posil thct l[e speak oi eompaund interest Eo indicate that the afilount of int*resn earned on
',* :xme pud of lhe printipal at lha
a giveri deposit has become part ot'rhe princlpal at ihe end c{ a specitied period.
Wirh a rr ,.i o ;perilied period.
The term principal refers to the a.rnou'r or mcfiey o:i which the interesr is paid.
5 4 rdr- : -,irc, pe i
fei: -cft- -t :r.r,n; Annual cornpounding is the most ccinfilor type.
"t -^"... ^.,
ll'vll.',uinjnr'',1!lUlUl
",Li.l';"t",".r Ite hrr:r1c v*!i:i l.t a pi-ei,:ri a:n?i:ni;r f0..i.:.j h.':il.Fl)ring ii,1.t!piiii?1:j :jitii-
r usiEg : -.:;d
:oncet- est aver a lpecified period o{ tiin;:. savings insti;utions advertise compound inter-
-- -,'= ;,:lu+
^Ll^*- --,. .l]'-'e
d n Flesenl snor:rt qi g
tr!-:'r6111nq at a farf i,t;r rc;'cer:t (lr s rerccnt interrrt compounded anrruallr-.
^^-j^--..-i,.- -..^*--t.. -.^--.i"!-. ..,,. _.r-!.. _-.i..:!=. ^_-^._-l- TL^ -^_-
. . - iiia irrnd ii.! ni:;ilitg r-a,r;-
>u also , : - -'i ,ifrrst6vEJ e srlerilifd i,rriad c{ipt oi iutrrre vaiue wit}r :rnirual eo;npcunciing can be iliustrated b,v a simpie
examilE.

sv*m*r.* Y lf j;.rr-i R-{:-,:enn yidLlo q{Oa,;*,...^-,:*^-

-1...-.. .y.ruv rlr a:aa.;ii.itir a(:arjij,:ii -^,,;..^ t}i},, :--.,-_..L.-^-_-_-"___l
lrnyirib ir r.u iiiiCrlCli! COmp(riin(j_
.,.,,,,,..!1.. 4!
., 1 rrilr(rdsj: ...L-rrrr !rru
.-: ui.,.1 !i ....^- jic
l-^..:!i :_--_^ t!.1,i
(u
)Lar riiii ilarf -, iwd in iile iccuilni-ine _L^:_:,j_!
.- _r- lniiiaj
i"
principal of $10CI pius 8 % l$8) inreresi. rhe future value at the end of the first
1ea r ls caicui:rrri hy Lrsirig ilquJtioir i. i:
Furure r.aluc at end of year 1 = Si{J0 x (1 + ,C8) = $108 (5.1)

li l-lt,J r.\'f!"e IC le;Ve :hrc rr+n-{ !n rho 1 r,rIni lcr yrnrh-r

,\,,,r.r\/.irLj ....411
rLdir ho
;ia r:ra:rlzi
.vuuiu hq
ur
pai,j intrresr ar rhe rste rt{ 87i o* rhe nelv principal of'$1c8. Ar the end of this
sec4nd l ear rhr','r rt'ollrl hr $ I l+ r--t ir rlie ecrnir.r*rhe
ii __iiii n-r.,. ir,.i jlcr the
j,i,ijiji/.ir h^..i--
Llr! uliiiji_
r:i*nof ..,crr)r{1t)\l
lLu, -- \+ r\,u, inh,cQol.-{*!,"qlne/(Q
prui r U iri ;i.i( JrUJ iJO.O 44\rti-t..-"+'rL^A,+.,.^..^},,^^-
il iii iriili;5i, i:;u iUi";ii.- ,diui ai
,ho .-*l L'r :^
^1 rL.
11:r ...^-.1
.LLU:ru .'-^.
1!dr :c L-.t-.,t^-..J
jr! UiJiaai l-., ..-:*.- u^.. -.:^- .].*.
U-\ U5;ii;i aii-rir!iiiji;: -- 1

Future value at enc{ ofyear 2 = $108 x (i + .08) {5.2)

= $116.64
i&t PART 2 lrrp,.lri;',i Fine"cirl Corcr-p...

Siil:li:lartiut the expressicn irer'nreen the eqrial si65ns io ilrilraticn i.1 ior thr i lt]8
r:quIL it. L\irrd".rlt I r u: ;r.rr
-. u_Ir.. ; lIJr:rr1I

furrre vaiue :ir rrtd i)i teai 1 = $10{l x {; r .{i,3} x ii + .i}3) ii.-i;
$i1l0xai +.0g)i
_ 8'r . a Lr

t This equaricn ieails {l> a i.!l$rr lri:ciai ioiinula for c:ricrilaring futtre r"aiuc.

"Vq!*e
?&* Equeti** {*r Fsrt*ra
T?ie l;asic reiatirnship i* Equation -5.3 can ire gencraiized t,-l find the future valut
iifter arv i:iir*Lr:r of periods. l,ei

F1,;., = tuilre ,..:3il1c 2t: lili tnti o{ i:r-:io,i t

f I =,r11:X; prt,iip;i- n1 i,1cigrr1 ,,1i;"
i: =.j:-r,rual ia{; oi ir",r:rest paid. (Nrte; i-in financial .*i1,ti.li.,s) I is r:lpicaii-,'
,.;6! i1, 16Ln1r.-.,r. ::) r j-l;i.i
r ri 1-11:iiber olt peri|ris.-*rpic:lil.. ;t.::ir;-th.- rlroile-v i:, iek orr aetrrsit

B;'u:riiq thi:,;:r.;t:-:lic;:. a genet'ii L'fiLiati{-u ioi tile i:rl;-ire vaiuc;rf rhe trii ui
prr:iioii ,r can i:i iorrnuiatta:

I"hr: application {ll Elquaticrir 5.4 can bc illustrat*d hv :, simpie e--{amlle .

*xsffiF!s Y .iace Fa:blr p;aced. $Atlt ic .t- savinss accoij{it pa,virrg 5o.,i, intc::tsl r{-;x,ir!ruii!L',:i
aiiiludti"r; anri v.,ritdei! irl,-ol. rrrneh moiitjl.r,vill be in iht rrcccutt: ii. aht eird of .i
-,^-.,- (,.k-;;+,-.-j-...- l-,r,i -- iilai:/i L -- !1,i -. i i-*.- rl-..--':-,- i 4 -l-,-.. :l-
^-.i
ii{rl.ri-rflt at t}re r':risj ,:rf yea.r ,!:

ir:v." ., S8'li x i1 + .i;i]l' -- .ir:ii: : .1 i i.j -in r -= i 1 i)7{i-41

f;rli,'..,;*ill ha,".r. $1"070"40:li riie aci{ir-rr.ri,.:i the end of. thr: liiih 1-e;rr.

.i'ime-i.iae Us*'ihir a$aiysil r;n he r:ir;-ir:ied {rn:r 1i:ne 1lne,:l si:r:ruti,

j-ime iine icr i,;tur-e .rc;ue c.i FV. = $l .Q7O.4A
o sinrlie omouni {53,-}i
initicl principoi. ecr',. rq .

$7c, ai the enri oi 5 ',;s115;

Pv= $800

A, End ef Ybor

r!-:--- ?-LE-, ,
-i Ls,(uleisrB rs r*i---e r: .r r.
r. 1r
ilfl{I
d

u5ialq ifiale5 s{}* r#ru{€ vfi{tre

:..rit,,lg fi:c tqr;tion in the preceding ei{aftple .is timr-consuming, because one
musi raise l.?I: rr; rhe Iilt* pD'.&ei. i-Isi*g a -l:r-rtur*: value irlleiesi tabie cr;l iir-ran-
ciai ca1;i;i:rii.:: qieatit'simpiifit: the caictiiation, ils *c,.l.iii ien:otsirate rr thrs
 CHAPTER 5 Time Volue of Money t17

Bec*use the annuity due's cash florv oecurs at the beginning of ilre period rarher
than at the enci, irs future value rs greater. Irr ri:g sxsinp,le, Fran wor:jd earn abollt
$400 rn,r.e r.r,ith rhc anrruiry due.
In spite of their superior earni*g power, a*nuiries due are much iess fre-
quenti-Y encounteret1- Thrnrghnr:l the remai:lder +l t}:is text'+,-c t|eiCfc:e e=pi::l-
size ordinary annuities. To reiterate , unless otherpise speci{ied" the terrn
"anny.ity" refers to r.xdinary unnuities, ta utbich dre F,TIFA
{actors in Table A^2
iirecii,^,, a?g!^; c*d y,i.:ic!", fi:textie'! :c!*t!;!crs ,*ic.;; as sta;;j;;i.

-{*9 l)ifferentietr: berween la) an ardinar.L arutuity an.j (tri an annaity due.
Which ahvays has greater {,,rtr:re valr,re l'or other.,.rise i,irnrical alnuities
and interest rates? \X4r,v? Which form is more common?
5-10 Exptrain holv to conveniently determine the future cf an ordinary
annuiry. i {ox'can the fufure value inrerest factors {or'aiue
an ordinary annuit-v
lre conveniently modified to find the future value o{ an annuity due}

It is often useful to deterrnine the value t,:day of a tuture afirount of money.

Present vaiue is rhe current dollar value of a future ilrlount-the amounr of money
The rurrent dollor vrlue of o iulure
that wouid have to be invested today at a given interesr rarf over a spccified period
omounf lhe omount of rnoney thot
would troye lo be inveiled todoy rl o
to eriual the future amounr. Present value depends largely on tire investrnent
n;r,-i
g:rEr ;n;^,^;
irrr6rsI .ni^ ^--- a^ --
rsrq ura - -rtr- )
)ijcr!*fl onnr)r'il'!nifi.,, Ot ihl i'ecip,i"-ni an.j thc pc.int ;r tx-i1r;l .,.r1;;r!; ilrs i..iiiuui:L i.; li> be
I pedod to equol $e futur! omounl. received. This secti<rn e-xplores the preseni vaiue of a single amount.

. iii$e*1;i11ii!<l atalai'i ll3-ri

n-
i.rE -, ^I I:-f.--
^"... Ur
PrvlE)J
-,^-^-.
I'tiu{,rg !tE)tIl Ei fiFSFilT 'ffiiiiE
tie inrene o{ rompounding interesl.
The process of findi,g presert ,ralues is often referred ro as disc<luntiag cash
flows. It is concerned with answering the q,:estion; ,.If I caa earn i percenr on rny
',,1^^r i. +L- .!! *^-. yv uLriu 1--
ril.\/r! IT -",^,,r-l r/r --.:ll:-
w ulrsli- LU jJal lruw
{--
- ^,-- 1uI arl uppultultlly tt,
i--.--:-.-
i-ait- rELr
'i
fl
.-.1.-.i1.--,,
ao:,iats "-
i7 _.--":-,-:-
p(.r rwu) t-^._ -^
uuin r---r!
luLrdrv ; r!r rrrs prrocess 7,
is actuaiiy the inverse of
compounding interesi. lnstead of finding the future value of present dollars
n6W
r--L*:-,.--
nnri producti iiy ising
t---..,r:-,
.-..,r:-, --------l
ff investeci ar a given rare ciiscountlng dererrnines the
ilr( r"nt ualu" oi a future
--------l--.4!
pul)qiltH --.4!
,5i!fi
"vun,
,uvrrrllr uul)qiltH
EaauvrrlSr IEI
IEI amount. assuming the opportunity to earn a certarn return. lt, on rhc mone,,..
olso frequenlly us* suth terhniques in
This annual rate of return is variousi,r referred to as the discount rate, yequired
rqlrr;lotilg locrt rltrer-ri:slion stledules
ona $0il! olscount 0r0 premtum tqt,rer-
retl.lfn. cact oi ruh;t,rl hr otah^?t7lnitt e..t!v.
-, ---r"---').--'-rr.-.---'--,J
rrtct li "l-L'."- e.-*. ,,,i11 L- .,--,1
uoru :-.^-
uiali
..-)".,".--.. 1--t-. :,. -t--:. =,....
ltt LiLts LciL,

r ,-1,,,-i-, r.^.. ^- ..*-^-....:*.

tsr*-t^ ,-,.,,.i ijiuiiri
r:iui tO ----^:,,
rA:: ait Opp(ifiunii-) -^ .1^^ uric
rfeE;i'f bjiJLi itar iruitj rruw. ii hC ean
eatfi 6:/a oii his ir.rvestments in rhe normai course of events, what is the most he

i1' Thc theoretical mderpiming of alis "required rerra' b inroduced in Chapter 5 md irrther refined in subse-
quent . hrprers.
 2rE PART 2 lmporloni Finosciol ConcePk

c; Use arrows to demonstrate, on.the time line in b, how discounting to find

present value can be used to measure all cash flows at time zero.
d. Vhich of the approaches-future value or present value-is most often relied
on by the financial manager for decision-making purposes? Why?

". . . -.- #--

**-"' 5-2 Fu*:ie calc-ilaiioii Witlioatt rcfer'riitg io ittbies w ibe preprogrammed
-,.alue
ffi function on your financial calculator, use the basic formula for future value
along wrth the given interest rate, k, and number of periods, z, to calculate the
Lia:ii vait:e ir-rter+si faetor iq each cf the cases showa in the ioilowing table'
C'ompare the calculated value to the table value in Appendix Table A-1'

iA.'i
ii

"E,
€
S...:i

....- ...- 6g. 5-3 Future value tables Use the future value interest factors in Appendix Table
"'um{" ffi A-1 in each of the cases shown in the following table to estimate, to the nearest
I
year, how long it would take an initial deposit, assuming no withdrawals,
a. To double.
b. To quadruple-

..2*: ru z6D. 5-"{ Future values For each of the cases shown in the table below, caiculate the
S/ @ Y fut-*re vaiue of the singie cash fiow ciepositeti tociay that wiii bc avaiiabie at the
$;ri*n €Dri;, ead of -the deposit period if the interest is compouncied annuaily at the rate sPee -
ified over the given period.

g
a:i::::.i'

:Aj'.
.,3 .',:. .7,

C
E ID
rr. *:!{tryr.;
L
f 4S,90+.
.
-J{-1,{flfii-:;
::
L!

12
r?:ri:: r; L:
9.:ltr.]::,::,,:

-
 Multiple-step Income statement a,cl Classified Balance
sheet
Problem-3: The adjusted triar balance corumns of
Apex Company,s *o;urn";m
year ended December 3'1,,2019 are as follows:
Debit (Tk.) Credit (Tk.)
Cash 15,500 1\ccumulated Depreciation 10,000
Accounts Receivable 10,1.00 Notes Payable 25,000
Merchandise Inventory 30,000 Accounts Payable 10,600
Prepaid Insurance 2,500 Owrrer's Capital 90,000
Store Equipment 94,000 Sales 5,35,900
Owner's Drawing 72,000 Interest Revenue 2,500
Sales Returns and Allowances 5,700
Sales Discounts 5,000
Cost of Goods Sold 3,63,400
rrergnt-out 8,600
Advertising Expense 11,000.
Salaries and wages expense 55,000
Utilities Expense 1,7,000
Rent Expense 25,000
Depreciation Expense 9,000
Insurance Expense 6,500
rnrerest txPense 3,600
6J32@ 6J3,gffi
Instructions
Prepare a Multiple-step Income Statement of
Apex Company.
Solution-3:
Apex Company
Income Statement
For the year ended December 37,207g
Particulars Tk. Tk.
Sales Revenue
5,35,900
Less: Sales returns a.,d all6*in.e, 5,700
Sales discounts
5.000 (10,700)
5,25,'1,00
Less: Cost of goodsiold
8,63,4C0\

-r-_
 Intermediate Financial Accounting

t"ss, Op".utin!
"i["rrr"*
S"lT:r u"a -ig",
Rent expense
""p"r.,r"
Utilities
"*p"ro"
Advertising
""p"nr"
Dup.e.iati-n expunr*
Freight-out
Insurance
".pe"*
Total operati"g
"-p""*,
Income f.fi;perations
add:Othe@
Interest ."rr"a,r"
Less:Otherffi
Interest
"rp".o"

I;,13U lh#*;';j.[X,,::,ance
ror Nahar cenerar store at December
3 r. 20r8,
Tk. \_re(lItS
Buildings Tk.
1 2R ROn Owner's Capital
Accounts Re.eiriHe 1,15,000
14,520 Accumulated Dep-Buildings
r:repalo lnsurance 42,600
4,690 Accountr I{FbtE '1.2,300
\_asn
18,040
LYurPrrrent 97,790
62,400 AcCum ulated D$:Equipment 19,720
67,000 Interest Payable
Insurance Expense 2,600
780 Service n"""""" 17,190
L/epreclauon L,xpense
7,360
Interest Expense
2,600
3,00xi0
Instruction: e00180
Balance Sheet; Assume that
Tk. 22,000of the note payabre wilr
ffXil;i;:ssified be
224 PART 2 lmportont Finonciol Concepts

G,**cn,As g$, 5*23 Presect value concept Answer each of the following questions.
'-'-**-'' W a What single investment, made today, earning lZYo anm,al interest, wili lre
wofih $6,000 at the end of 6 years?
'What be received at the end of 5 y'-ears ii the
b. is rhe present value of $9,000 to
discount rare is 127")
c. lfhat is the rnost you would pav today for a promise to repay you $6,000 ar
the end of 5 years if your opportuniry cost is 127o?
d. Compare, contrast, and discuss your findings in a through c'

5-24 Freseni vaiue jim i.iance has been ofiere<i a future payment of $500 tLree
@@ 1'earsfrom roda',.If his cpp<:rtuniry cosr is 7Yl" compouiideC annuallr'. *h;t
value should he piace on this opportunity today? What is the most he should
pay to purchase this paYment todaY?

i @ qF fy 5 vears lrorn purchase. If the state bon{s are tobe competitiye ..vith U.S.
ii*,&qr!'iArE Savings Bonds. whicir pay 87o aanual interest (comporurded annuali'v), at ';vhat
price must the state sell its bondsi Assurne no cash pa,Yments on savings bonds
pri.r to rederrrpti,-'n.

y#@ iitit*t{t}t4G
5 -2 6
i:-J'r,1 #i:; ;l:i ::iJil ?jtr,.:T Jfi r
E :"', :.:?; i:'i,# il il:
t
is guaranieeti by the srate in wh.ich you iive, opportunities exist to seii the ciairn
:::::1,
roday for an inrrmediate lump-sum cash pay'ment.
a. What is the least you will seli vour claim for if vou could earn the foiiowing
rates of rerurn on similar-risk investments d,-iring the 10-year perir-rl?
t1\ 5%
izi r%
/a\ 1lo1
\JJ LL/o rr I
.- -L ar |
Lu, D-,.,^-1.
;\uiiuii\ d u,'L,L! -L-
- '.-J..- ^.-'.--.:
r',u aSSijmpiir)ii inii -- -L- ^^^ ^^^
ini oi"viiv'UUU patiltctl. wtll I)e
receir:e<i i* 15 rather than 10 years.
c. Based un .\,our firidings in a and b. ciiscuss rhe effect of both the size of the
:.-:re,:i rrlrr. :,n{i fnr tilr:f :.r:rlri :"ece:iI ol;.r'rir.'l cx ihe p;-fsfni','ajiic +i a

futu::e sum.

..,.:,.,) &, *-k S--U: Prescrri valu" ,:ompansoas of ir,:np sums in e-,:change for a $20,ii00 pai'lxrrlt

rtii!:i*ltlil.'I s[or,,.r rn the ioiiowing table. ]'our opportuniqt cost is 117o.

 Less: Cash purchase of any nxea assets
Net cash provided by investing activities
Cash flows from financing activities:
:Cash received from issuance of bonds payable
Cash received from long term borrowing
Cash received from irrtlrr.u of common"stock
Less: Payment of cash dividend
Cash paid for treasure stock
Cash paid for.redemption of bonds
Net cash provided by financing activities
Net cash increased or decreased in cash equipments
Cash at begirming of period
Cash at the end of period

r cash basis Problem-l:

instead of The comparative Balance sheet of Kajol Corporation at
the beginning and end of the year
rsh receipts 2017 appear below:
e difference Kaiol Corporation
v operating Balance Sheet
Assets Der..S7.,2O1.7 lan.l,20l7

E
Cash 45,000 L3,000
Accounts Receivable 91,000 89,000
Equipment 39,M0 22,W0
Less: Accumulated Depreciation (17,W0) (11,000)
TotaI 1s&ooo t1,2,w
Liabilities ana OwneE, Uquity

illl
Accounts payable 20,000 11000
Common stock L00,000 80000
Retained earnings 39,000 17,000
TotaI 1s&ooo 112,W

1l
ll
Net income of Tk.44,000 was reported and dividends of Tk.23,000

Required: Prepare a cash flows statement for the year 2017.

were parnin2017.

-"arTffi
 Cash Flows Statement

Solution-l:
Kaf ol CorPoration
Cash flows statement (Indirect method)
For the year ended D;ec-31',2017
Details
Cash flows from operating activities:
Net income
Adiustments to reconcile net income to net cash provided
b,v opera ting activiti es:
Depreciation expenses(1 7,000-11,000) 6,000

Increase in accounts receivirble(91,000-88,000) (3,000)

Increase iu accounts payable(20,000-15,000) 5,000

52,000
Net cash provided by operating activities
Cash flows from investing activities:
(17,000)
Purchases of Equipment(39,000-22,000)
Cash flows from financing activities:
Payment of cash dividends (23000)

Common stock issued (100,000-80,000) 20,000 (3,000)

Net cash increased in cash equipment's 32^oo0

Cash at beginning of Period L3,000

I Cash at the r:i'id of Period

last
Problem-2: Presented a comparative Balatlce sheet of l{abaya Corporation for the
two years at December-31:
RabaYa CorPoration
Balance Sheet
Items 20L8 20tr7

Cash 177,000 78,000

Accounts Receivable 1"80,000 185,000

Investment 52,000 74,000

Equipment 298,000 240,000

Less: Accumulated DePreciation (106,000) (89,000)

Current liabilities 134,000 L5L,000

\
s58 chaotar 19 Multlnildonai'8uJln€35

The inrernationai Picture

The scope of international trade ts enormous. It has become an
lncreasingly important part of worid economic activiry. For some
countrtes thetr very economlc health is slgniflcantly affected by their
ablllty to seU to global markets. Examples of this situatlon are Japan
and Cermany. whlch exPort t6 and 27 percent of thelrgross natlonal
product (GNP) resPectlvely.
Beyond the econornlc reasons" trade between 'natlons benefits
those lnvolved bY:

- lncreaslng the vadery of goods and services avallabie to people

of all nattons and thus lmproving thetr standards of ltvtng.
- Encouraglng lnteracUons that facilltate understandln$. Coun-
trles that comrlrnlcate wlth one'another and depend on e.ach
other economlcalty are less likely to go to war wlth each other'

Closer to Home
How important is lntemational trade to the United States? Although
we eKport less rhan 8 percent of our CNP, lnternatlonal trade is
lmportant both to us as a natlon aj1d to our individual domestic
companies. I As a nationwe are involved 11 intemagonal trade through
lmporting tmporttng, buging goods and seruices abroad. and cxportiag'
exportlng setitng giod-s and. seruices abraad. In a recent year the U'S' De'
partment of Commerce reportecl that e"'cports of goods and-serv,ices
iotaiea g332"3O4 btlllon and imports totaied $363,743 billlon ' In- aa
ternational trade ls blg businessl Table 19. I presents a summary 2:
of U:re nallons rhe United States marketed to (exports) and was a<
supplied by {imports). ln addition. Table I9.2 supplles a geographlc
view of Unlted States trade wtth selected countrles'
Exports are norff a significant percentage of total sales and
revenue for many companies. Opening up new markets is a majol
"lable l9'3 shows the
element of manyfirms; marketlng strategies'
leadtng ex?orrers among united states corporations. Note the sig- exisls
nificarice of th. e*p<r.t sales as a percentage of total sales'
td
farrc

Major e*ncepts in L)ri-^^^

lnternatEonal Trade
-!'he .{ r:at: ::.
Susirie:Jo r-ri 1$ i:1tfl:n3-i.ion;,, icaic ha:s a language all its awn'
r
l,,i e ein-.: :l
cdtir-;ai trririx i,.;C1:rie brai:,1ce ,:f u"ade. baiance of payrnellts, exchange a col.ir:t-.
rate. and ihe concepts cf absslute 'advantage and eornparativ*
1

ba;a-r;c:, a
advantage. oicurs. :i
I'41:I:l en ls.
Baianc.: oi lrede ftt h.,
barlkinE.
balanee of trade A narion.s balance sf, trsdo is the ciif{erente between ttte dollai- c:ompante!
ue.Lu.e ciI' n(:tton s exporL:; r}-nd il"e .roiicrr uo.Lue oJ its i'mpods Jor
a statel1, perlod aJ time. if exports exceed inlports' a trcie surplus
38-14
 fai;:alrjitJl ?fAiJij
:qo
T_op Twenfl-Flve u.s
{LXporis} Le?ding i;.S Sul:i:Jiers
I:?1: , The L€adrns Lr.nire;
l,Excori
ilrnFOrli,l st;tes and tmpon
E9orld lfo*ar s"o0"5 iFjgures in Bilirons
l. Car:ada Bos.Id ?*tal IrTlufu
i-jr-'lla fSJ
of
il8. ri Si,i:cE ..U.S Trrcp ar,,t,-^r ..
2. Japan 2i.9
1. Canada
-i.i rcr.,
Tj.Lj_. r,..^,.._-l ,..us:1ess
3. Unlred Kin4dora ?. Japan q.li, i r re::cjp=,ril,, ot,.",]r,
^.
i:.a::3nai r.,atir,,. ,",.
i. Irexico o'1 3. Merirl tr u
,' |_:-. !".::nva:r.arnr .qnalvsr! r.iaerfi;
j'''tl, ;.' 1^ ? ;;;i;,*i,"i I' ;'-#,:,:',i
S. Wesi Germant, 4. West Gei-rn:rny ;;.
; lgii: ot^YI_e
. 6. Saudt Arabla $. l.inited Xjn{dcn:
7.9
Z. Ne therlands 6. Taiwan
7.S t i,-:
8. .Francc 7. South Korea ?.i
5.t)
9. South l{orea 8 Hon!: lionr
iO. Belg,um and JI y. tranae 6,i
l0. 6.0
Luxembourg lrall'
5,al 5.5
, l. Ausrralia
rt. 4.8 . Indonesia
I aiwan
J.J
I3. ttaJ.1, . Br3"ii ,1.$
':J 3
14. Slngapore -ii . Venezuela ,is
i5. Swltzerland )1.. Nigeria
16. Egypt 3.o i5.. Saudi -&.rabta
tc
i7. Venezueja 16. Algerla
. J. IJ

18. Spatn 2,8 i:, Netie:lands .i. t)

i9. fiong ttc)nE l.u 1a S!ngapcre

2O. Braeil t(: ituerland
S."f
21. China ,).> S';,,cderr 4.1
4). tseigiL:ix :"nd
2?. South A-frtca Luxembourg
21 22.. Nethei-lan<ls
4a ls rael Antilles n'a
nA 4.t)
Ll.S.s.F"
otr 2.0 2.2
ladia Australia ')1
r.a(
,:5, lndia
2.2

il::.H#;T* iras. a iar oi :ri:,., rra.

ff:fu,': r#tr ;,:{}:*tii*;= I..,,, i::

Bajance of pay,rents ";l*:,'
A. r:ation rs .baJancc
of. lr_ade
i.irroirtli +J ntaneu
Iiie^ rc,*:r,r r. ,-ie
;
:.r;'. r.,,;r.:.:rr*::tai
ihar-flgr,s l,rr,, .,.iT
a-coiuii'.. e.Kr./_r.;en.s;,,.u;;n"rl.,,,"_:_.,'- . .1'-rr..[.:1r;t, ln*i:* frl i:*yffi enfs
3 . . .:,,;
l;;J

-,,
;:, l':
: :.Tr
i,alfIenis.
*i:Tr*fxffi lii-l i:: fft';:
..
:,',,
! iljrr*:T!',:r.'i.. .:t i;,il;,i.a,
!i
: r,;
Oihr:r acti!-l(ie afiecr
,:a-':kinE
,r*"oo.,t l';'l 1'-'i 11, ,j: i. . .. ." . ... ,.i
rrriiii":;r" i:'1 -r''.,', r '.' j-:: :-i. ,

.o,',rp*i,, ,
;;;;;i"'r! s :n lorcif1 i!-;;,;,;;, :: t' ,,
l'i:' . ,i
;1" .'' ,- jr r:::; ''
;
;::ii i:{.:r ; l :

- 3-r1.
 MaJcr Ccnce!,.tS il lnte.n3il{}na; Irade
cal

Tabie 19.2,. conrinued

{.J"S. Expot-ts
u.s. tmpsrts
Area and Country 198C ',9f1 1982 1983 1980 1981 '1982 't 983
Sub-Sabere Aft"lce. (coatinued)
Guinea
ivory Coast
i4 5:3 28 $4 96 t21
f
lo4
Kenya
r30 9f, 6i 388 344 303
Malagasy RepubUc
trl 150 98 6g *.,
52 71
34:3

Malawi
7 i6 24 nt.1
st 7A 63
65
?1
Jri
Maurlta.rrla 20 ,a 4-
.t3 62 31 i4
Maurltius
bo
i') !.1
t, I
Mozambique
ZZ t8 i.5 I 50 2A i]fl
i

69 35 32
26 2A r05 q
Rwanda \ 66 6
-A'l I
ZL\
Senegat
42
oe. 40 33 2E
30 38 o irj
Sierra Leone
Somalla
+r 26 15 Ii '/'J
45 35
5S 22
47 46
Swaztiand 6 72 {'i
'66 2Bi ("i
Tanzanla 58 l3
7.a1re
62 48 41 .t,'l
ao
lg 29
i55 ]4t 14
90 83 418 423 4A?
'L€s-s ths$ S50O.O@.
3S&

lrcha:'ige Rate
Each couni' has its o\i"j-r cure:ic-\'. ll*en
a conl-act ror the saie
of goods betweea ccunuies ,a ,-rrud. ii requires
converted from one country.s currenc!, il1e price to ile
to another.s . The rate ai
urhich rnoneu qf one country is conuteneci
ar exchangectJor another
ls knov,n as the e.:changc'rate,
'rhe rate of exciranle c*:-n be established th:-ough exchange rate
exchange rate where ihelate varies w:tl a floatlng
mart:et eunditions. It can
also. be es*blished bv ttre gcv*r-fimeni *
a contrsred excrla.nge rate.
?he governneni oi'u"""urr,ry
"*,ft#"r,
.r_he
exchange rate ;rnd
in tui-n the atrractiTi.:" of.gcoas. e go"ernrneflr {:ail pracrice
d,e9&Itrs.tloE, or lnerec;sing fH_e rorte
c-!.**i;.o^o., Gt rrj?.cliJr.oreifn Ssxfaiuation
currenca rlill be tracied.Jor ei*mes&;
cutr.enc!.t..,1s;rn exarripie, rf
the Untted States."r-::ni tte exef":anl.
53"50 for €t to SS.OO for St, rt wor.liJ
*r* fc,. briilsfr pounriJ?.o*
*""i"r.a"
more United Sates *rpc,rls iS! i:u.,,s $l.SCr L.le nfift$h ro bur-
rnore of g*orir ajler tii
devaluation] a::d worrldrnff'ease tr."'*ort
importers b3'SJ.SO for eaeh *1.;-exp;ias gc+cs ri: A*lerlcan
"rirri*sn
ti-r gyS;ain rose and
imports frsm that couniry ceciined,
tne trace d.ficJi *,irh Brrearr;
might b,e ellmtnated.
The governrnent can praciice rwnra,*tlouu. cr riecreasi^E
rate aJ exchange at urhtch ihe rey&luation
Jareign
domestic currenc,.t in the p.*-oi, lr:iil tre fa'd.ed jor
"ur*n"ytf tire Lintred Siares
**npl*
lo.w:I"d the oichJnge rare fc: Br-,iristr p"-#o* tiom
Sl.O0 to Sl. tire rJsUl wouid be ,o sj.S(, tc SI,rc
Uu-ving-eriJriJ" olor,u
tj,r."
-- r-"ri!-a$€ t-hf Erilish from

-
 Interruatiort s,l,
fWunz,geriu,i FL{L&nCe
nI'
J
I
L

Undersiond the moior foctors inlluencing the finoncioi operoiions oi

mr rlfinntiannl rnmnnnia< llv{N(^.i

Desciibe ihe key differences behrreeri pur'ely domestic on.j i'',ieriio'

":Q1
tlF tionol finonciol siotemenis-poriiculsrly consolicioiion, tronsloiion crf
individuol occounts, ond infernotionol profits.

& L)iscuss exchcrnge i"sie risk

MNCs monoge thern.
ond politicoi risk, ond exploin how

Describe foreign direct investment, investment cosh flows onri deci-

{& sions, lhe foctors thot influence fulNCs' cepitol shucture- ond ile
, I l-l,r - --l -- :. n---. *-- - l.i-I. ,- r(\r..
lU IvItu5.
illlclllUilOIlUl UeUl UllU flUllv l!))flUIIlelrlS lllUl LIIC UYLIiIULJI9

ffi.
w Demonstrole use of *re Eoanau..*"n- rnorket in shsrt-term barro'rr-
ing ond investing (lendingi crnC the bosics oi cosh, credit, ,:n,J
:, . -= =!--, :-. :-.----r:^--i -----*r:--.,
--.-----=.---!

.,h growth ol cnd specicl foctors reloting to intemohonal

Discuss the
\dr merqers ond io;nt ventures,

f,md $fs'EfrV$r*{Enq*ufi
Hi::t Ce;
lll rea:enr Yea!:s. 11s flavc Deeorne slgnlrlc,UiuY Ir]0r!" trlaii!:
lrrOr.tti rtiiltKets mYeq6G0*!
ien1. irrternarl()nxi nn:tnae ir:t fre;ome an tn"-rrasingiv imp,trl3nl eirm.:.' - Pofrrlrro (r*Ei I
ntilii rs:l*ral r,!1itci j. : rlarlilgemrrlt cf mu]ti:rational r:ornpanies (MNCs). Thcsc firrns. L.ase,l ai''.'-.-- ftopta6.k=l
,;i.-lL-!-
ruErnl@ e;
ai.-- L-.,^ i-r-.-r:^-^l irr iltlwr:r:idr havr iiritiuaiiuri:i]. assris arril upciaiiurr,. itr iuLr,ig,, iii.iii--.: !'t k
rilrn) iL^/
in€r ilutc trilatrunutrui u))€ --:
-..^.-) uilu inYeslnE{d

oBaro!ror il foruign mslko$ on-d dro*

or3lr Lr3.rr (.!1 tnell taltal revenue p.no prolrts lloln suan filarKels. tne IIrlia., . mlwb io< c ir
pcl,r 0i lh€ir t0t0i rBve*ue qnd proiils ! .,lrtrE.-r,li iirrli.t pLcSCrii(tl rri iiri: iu.ri :rr' rp1,lrq.1!ii io ii,i ,,,i.'. r.. [ptxet. DY rE",Tl

{rom surh markeis. \{\i-s.}-Iowever,ctlrtainfactorsurriquet.ltheirrternatiotla1Seffi]]g|.l]L: rno*ets Fm:

=
cyditcl cro4a I

*1?
 "Goodbye-Let Us,
{ryo* Wheru you Get
There"
In the year lZT1, atthe age of 17,
Marco
Poio ieft Venice, Italy. Traveling
by ship
across the Mediterranean aud then
by camel
across Asia, he reached Carhay_China_
more than three years later. (The
first junior
year abroad?) Able to speak
foor languag..
and having much knowledgc
of tfr. ,,Jorti
from his travels, polo was warmly
receiyed"
By the time he rerurned home
24 yea., lrt"a
Polo had logged about 15,000
miies. Today,
it is not uncommon for businessmen "
ancl
businesswomen to ffayel that
distance in a
iirde over a day' Modern Eansportation
and communication systems
have been iike steroiris (without
,h" ,i.i.J;; promoting the growth of
giobai Lrusiness opnortunities. This ehapte; .,=rill dera+as-r=;?i-e
principles of managerial finance ii:=
!r+r:,,

rn t}re inremarional sering.

pr.r.rri.d i' this book can be applie,J

plicate the fi'oanciai mzlqe^me-nr

of murrinarionar companies-
Hint ()eeolrh1rylillrc,frnm son berweeo domesdc i A simple compari-
mrglFdogsili*d*ltiwrtdu
poniom roqiik-aii'iEcEed i,
- u "* " rc d ;;
n qn _
r-,^l:j;;H;r111, ", Jff ^f "ra
:: *",

"ffi ;il
U.r._based nrNi(firri,ni,
ffi ; ;,.'.Iol'n o,i,,,,."*
gp.tor 6 ie #fr S!#ific tu rtn i,*_
nt#hWrhpdddhiE fur -' In the present internatioaar environment, multinationals face a variery
in$srttrsrc i,rts ti.e rtu* C m fcm. + is
Ie-*rs arrd reshiciions
x'ire3 grerati.,g ;o ,fifi"r";r of
nOriIe fuo frm economic compiexities existir-rg nation-srares. The iegai and
tiry6t io qdvofle
,; irirr are signficantiy
nndct 8y imi{ qpmfinx in;; lrom those a iomestic u.*,:tro i;... "J".*enr
E;;;take a brref 1ook dilferent
notets, finlr cuI smooti out some
rydtd duqs thotaurrineodr
of fu emerging trading blocs in No*'-am".i.r;;i';"rr.* Europe, at the newiy
morket- Duslness organizarion. taxation legal forms of
UfNCr, _"J nrrrrro"f markets.
"f

823
924 PART 6 Speciollopics in t'lonogericl finonce

Erro
A*$a
Eisrrq,;t
tttorEtrt r
'!bltFJr
crrrr3Jl
ornry.LI

[rnergitg lrcding Blsrs: l*AfIA, the [uropeon Union, aild illertassr

centered in the
During the early lgg0s, three important trading blocs emerged'
othcr Latia American
G;;". und tr\%st*r, Europe. Chile, Mexico, and several
policies in the late 1.980s,
;;;;; U.g"" ,o adopt market-oriented economic
States aaci iriih
iorsi-,,, -,-..rj.iose financiai and economic ties in'ith the United
and the United States negotiated essentially.unre-
o"th...'tr, 1988, Canada
"uct zone was exterded to
;;;;J trade berween their countries, and this free tradeEree Tlade 'a'gree*eat
i".1.o,1* l.deaic+ ii: Iate 1992 =+hea the I'Joit!: ,{=erle*a
the presicients of the Llnited States and Mexico an6 the
- lrlsth Americsn free Trude iNAffal was signed by
Acreemeni lNAffAl i,rr** *rirf.r* Eveotually, rhe agreement will probably.include Chde
thitrsoty estoblrhing frso tnde md
"?Cr"rar.
'ard other countries. NAFTA *as, after rnuch debate, ratified by the u.s.
econom-
opr markets htrresl [onodo, ilexim, in November 1993. This trace pact simply mirrors underlviag
' -";;;;a-nada is alreadl. the United States' Iarsest nadins partner. and
co"g.r*r.
riiJ the Ua'tdSma.

Irtc:cco ls the third laig,est ia{ter.fapa;) U'S' expo:'t in;;ket

The Europeao umon, or Etl, has been i]1 existence sinee ,1,9-56. It has
a eur-
!uros.a4 Union ifUl at more th'n
A *gn'ilitort oonomit forco currently ..nt -e*b"..irip of 15 ,rutio.rr. With a total population estimated
of 270.5 million) and an
rw& up of 15 nodon iltol Pnnh ftee Id *iffl"n (compared to rhe U.S. population abost
lm&fifih{Enfst n".rJig.o.r'natiinal income paralleling that .f the United States, the EU is a
,;gr*ttr1r.' giol;al ecur-rc,aric forc-. Due to a seiies of r=..aiur'ecortomic, morrctary.
iiiu.r.lai, ald iegai provisions set forth by the rnember countries <iuring the
G;il;;h. ;r"ntrles of Western Europe opened-a new ere ^i99?. of.free trade within the Ceneroi I
Europeon OPen Hcrke't feii at'.he eni, a{ This traasforma-'
irr-rion wiren inaaregioaai tariff barriirs ond Tro&
Tln tromformoioa ol the iutqes,
;;l;;;",rly clii"d the Eoropea-r Open Market. Aitirough the EU has m'a,r- t ir*',; iC
Union inlo o rirgle mo*oi ot yeor*rui
coniinue on ceriaia ril-r$ar
tr, L. aged to reach agieement on most of these provisions' dc'bates
auds
har rrrf
w)
 CHAPIER 20 Inbr,.1si6n"1 i/to:c3g_:. : -_:r.<E E?5

':irHa:al:l":

-"|!ffi-
,':i':;:::T:,ll1Tl.i:lltrncludins thcrse relateci .o aufon,,r,.-;:-,:--:
ffifiit,,.
- :-:
iur*
A:i,6ie*;r;;.;ri;=,Jiy iicfvr ;il
r"s i.Ii
u"'*"i'-i";;
the Euro' as u cootia"n"ui*
liilJl! J;;:::ii;;?::,.i; .-, =' ' .,1'
:::::t,f**di**"Jr'"*.t
Currentiv- rhe E.ro;t or-,g" beginnrng i",..r*, :
,tri,)r;i"
lunsrrons, b*;og,,=..a-;;; Jrnaqcia.r t.srrr".tii,_ - __
currency arnong tt::.::::; i.,.. . , - .-_
- .'
moneiurv urioa u, ,r* y"*ila*2, the nationai
.*r..,.,.. - - . .
#,flf;;f;;j#;*il;
rurrenty, rhe iu',, by rh. y,oizi.oi
::il:::il,,'il:';,?,i:,',* in n:onerary.,i,"1;rl''a..,1;}1:',::"'..
., ,

,"rrt:,r* ,#:fffji"|.;?j"l,;1o.1;an Liaion is srruggting ro imptemei: m :,::_

musr aiso d"al witi'" 'rrlu'rtu-Liiar!;.lg a nerr 81116p.'rn Cenrr-alB.rnk. .-- c-
L\re.rrcerranean ,.gi,lnlffi:.;::1,'.",,1.?,oli.,'rs
shape,
f,oi, ..r,.rn ;;;;. ,"j
l-=
*ilr ,rfe,- bJJ;;:i;;,*.;',:::l'lrillx;l rhe nerv commu,,iq:u, i-r:-,
1.
n u i r i na n.rr i i,.m,.,r r :.. c
ri o
".
heightened levels of competidon ;; .r p..i;;;' :;r[i:J ;;..o,
;l"rJ H::::,, :: i j,:
*lro, op.rn,ing insjds the Eu. As
exisring iesrri-ions ,",1;.g"r;;";;;;-"ffiinated,
..
more oi rh:
rronals will have to face for insrance, ti.s. mrirna_
The third maior t"a;"g
l,ixcr;;;;;.*
"riri, rrt"'r;;r;;r. withrn the EU itseif.
-
uroup of countiies in during the 1990s i, th.
A,;;ri;.';;r,,,r,rr* .r99i,rir. ,,u.iur,,
Soi.ii,i l,{.r.oru.
't'grnrirra' parag'ua)'- rna ,,.r,gr;; i.*.ln"r'l*,,oin*irt oi Brazii.
lntraregionai kade. Thr rrriifs errcr ,..rri:er her-rier-, r.r
I" ilil,ti #r 'j994' ,..oril ,i-g.Tr'li..c.sur,s deveropmcnt beSan at rhe
;:", end of and invoiver, rt;;;;,;*r, ol a cusroms union ro i;apose
a
;;:: ro.. n g r;;;
f&?."J",f :fj.:: ;T:T,ll ifi :: ;:i
;
",,
i ; ;J',-o *,..,,.i rr. u
fcun ders ha ci iniagr
"i*'#:ff
n eci i1.,'r."r.
;:...;:,1,ili; jffi :':I il#r:;^
$i;:1 ?;,fl ;':d,: T':?,:: ;* : :j:.,:;1.::.:.., r,i r.i,r,i,,,. gh . u, L a,, n
La ia,i n
t') a::Ts the growth ina.Letu *i i.;;;;.J ;.ffi
".;-an GDp. ano,h,;
ili.-r.*;il;;r,
.**"1'*
i::,lTl, J,:lAlli :,.i.1: :1
com;ranies .rn ir"n.fii ;. ",
,.--^Y :.
ruror:ean r:r:rket. 0,,r.:,],.:
.f pi'c'ciucrs
ri' a coiiecrion oi 1;.;;;;;r:#::i9*,:,:,li:::i,:l:T1,:l;,:,:1,:
varicci .;nr;;;r" and
he readl.ro *k.
;;|.'r::,:.;r;i"'.I'otJrc'*'as well rinrn.iri,.,,a*eis :rncr insrrr:rncnrsrd,rn,rE.
r rr,, h. . il;;;,;,:..,:;;:x
" (sucr-. :.

essai-'., iirei i:iii; jcini ,..entule.

[[:f ili:ri[T,rHi **i ;xll l*iri:,
*"d .ir"t*gia Jr,i*n.,_,

-$erers!&gr+emesf en lrr,lffs s*d Ts*de

{G"4Tf}
Although ir mar. seem
(renrrlt Agreemex!
cn Torifis :,Tif *,i r *H i :t ii#i; r:.:' ::,rp.n-r...r,
: ;:: :. I : r,; i : :, : : = : :
",

;,, .r;',:==r, ,r. ',,.,'.

:
'rnc lrcc'e GAli
!-+1 frt hr, ,.r+;r=r, +*.il,ii,;dc economies. The most;:'".1'-'-t*"tt*leiatrveiy

:",i r;;. ,*,i+";,#ir:;T".1i,x!1".::i?,,l].,x,:f.:;i; ::::::1 "1 , - .

:
-..51,, nrr:r ai rr+
::hs.f= f+d"g,,#Fci.;er erg; rf

f{lc
b hocd rff:tl.,:*t";:'";:;:*'o *-o'i'ii'"'iu ti.ougi,ou,
r ::: r.
e,' !{o.u'Dk qfdry ord pol;rod
b
riee
n)os: ,
t, ,
r:i*,, .,
,rrailing :-uies i,-,

_ __
a.ctrviry,.--such a, aqyl..Lrif:j:i:: ..
ffi,tffit&aoaa'an rha, ha,r;;; o;;;,il,,,i11;,Jj#'[I]lll;iXI;1, ,,,r _