Question

Two restaurants are on the same block. One has been opened for 10 years and its a thriving business. The other one has been open for only a year. They both want to expand. When the two owners to to the local bank looking for a loan, which one is likely to get a lower interest rate? Explain in terms of the risk-return principle.
The currency of Iceland is called the Krona. in July, 2007 the exchange rate was roughly 60 krona to a dollar. InJuly 2011, the exchange rate was roughly 120 krona to a dollar.
a) Over this period, would you expect exports from the US to Iceland to get cheaper or more expensive in Iceland? b) Would you expect living standards in Iceland to rise or fall? c) Is the krona appreciating or depreciating against the dollar?

Answer 1

1) the established restaurant is more likely to obtain a lower interest rate. This is because the risk in this case is smaller so the bank will accept a lower return

2)a) the exports are getting more expensive: things that used to cost 1 dollar (60 krona) now still cost 1 dollar, but now it's 120 Krona! because of this also b) the live standards will fall. The c) Krona is loosing its value, so it's depreciating.