Introduction to Finance

multinational corporation 
a 
fi rm that engages in international 
business activities such as the 
selling, or purchasing, of goods and 
services involving foreign countries
Investing Overseas
People living in the United States are aff ected by international 
fi nance at least two ways. First, the growth or recession of over-
seas economies aff ects jobs in the United States. If foreign eco-
nomies grow more slowly or go into recession, there will be less 
export demand for U.S. goods and services. Thus, a worker’s 
personal fi nancial status can be imperiled by a layoff or reduced 
working hours.
The second eff ect on individuals is perhaps less clear to 
see—the eff ect of foreign investors on U.S. fi nancial markets and 
interest rates. Stock and bond prices are aff ected, as are any other 
price, by supply and demand. Foreign infl ows of capital into U.S. 
fi nancial markets can help raise U.S. stock and bond prices, giving 
U.S. investors better returns on their own investment. Of course, 
money can fl ow out, too. If foreign investors sell their U.S. secur-
ity holdings, this can lead to lower security prices and lower, even 
negative, returns to U.S. investors.
Pessimism about the strength of the U.S. dollar can even lead 
to higher U.S. interest rates on everything from Treasury bills to 
home mortgages. Here’s how this can happen, using a Japanese 
investor as an example. A Japanese investor will compare U.S. and 
Japanese interest rates before deciding to, say, buy Japanese gov-
ernment debt or U.S. Treasury bonds. But, in addition to looking 
at U.S. interest rates, the Japanese investor will also consider the 
expected change in the U.S. dollar exchange rate with the Japanese 
yen. If the U.S. dollar is expected to weaken against the yen, this 
means the Japanese investor’s U.S. dollar investment may lose 
value by the time it is converted back to yen at maturity. To be 
attractive, U.S. interest rates will have to be higher to compensate 
the Japanese investor for the falling dollar.
Suppose interest rates in Japan are 1 percent and economists 
predict the U.S. dollar will fall in value against the yen by 3 percent 
in the next year. That means Japanese investors will not fi nd U.S. 
bonds attractive unless their interest rate is at least 1 percent (the 
Japanese interest rate) plus 3 percent (the expected loss in the value 
of the U.S. dollar), or 4 percent. If the dollar is expected to fall by 
5 percent, U.S. interest rates will have to be 6 percent (1 percent + 
5 percent) to attract Japanese investors. A falling or weaker dollar 
puts upward pressure on interest rates throughout the U.S. economy.