Question

Jersey Co. borrowed Singapore dollars over a short-term period to finance its U.S. dollar payables because the Singapore interest rate was low. It incurred a negative effective financing rate on this short-term loan which indicates that Jersey Co. :

a. paid more interest on the loan than what it would have paid if it had borrowed U.S. dollars.
b. experienced a negative stock price reaction due to borrowing funds.
c. will need fewer U.S. dollars to repay the short-term loan than the amount of U.S. dollars that it was able to use as a result of the loan.
d. will be unable to repay the loan.

Answer 1

Answer:

The correct answer is c. will need fewer U.S. dollars to repay the short-term loan than the amount of U.S. dollars that it was able to use as a result of the loan.

Explanation:

The setting of negative interest rates is usually considered an unconventional policy, but in reality it can be seen as a continuation of the perfectly normal monetary policy practice of moving the short-term interest rate in response to fluctuations in the economy. There is a downward limit on interest rates, but we haven't reached it yet.

The reductions in negative interest rates work largely as they do in positive interest rates, although there are some differences: the effects on banks, for example, and the psychological impact of interest rates that fall into negative territory.