Will a MNC issuing debt in low–interest rate currencies necessarily lower its cost of funds? Why?
What will be an ideal response?
No. The ultimate cost of the debt will also depend on currency movements. If uncovered interest rate parity holds, the cost of the low interest rate debt, expressed in the home currency, is expected to be identical to the cost of high interest rate debt. After the fact, the debt will be either less expensive than corresponding debt denominated in the domestic currency, if the foreign currency appreciates less than predicted by UIRP; or it will be more expensive if the foreign currency appreciates more than predicted by UIRP.
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