Balance of Payments of Canada - Assignment Example

The balance of payments should balance at zero but this is more impractical in nature as finding the balance of trade is always an uphill task. The transactions of Canada in these first two quarters of the financial year in terms of the capital account, current accounts, and financial accounts did not balance but showed some shift in a negative manner to -16263 dollars. In the third quarter, the balance of payments further increased to -17298 dollars while in the final quarter, there was a noticeable change in a positive manner to -14762 dollars. In the financial year 2013, the first quarter witnessed a steady positive change in its balance of payment to -14552 dollars. There was however a negative shift further in the second quarter to -14861 dollars. The third quarter of this financial year further witnessed a shift to the positive of its balance of payments to -14250 dollars. During the final financial quarter, the liabilities outweighed the assets to a further negative change of up to -15235 dollars. However, these changes were due to several contributing factors that kept changing in either direction of the economic shift. These changes occurred due to changes in current accounts, financial accounts, and capital accounts. As evident in these statistics, the economic power of Canada lies majorly in imports than exports. This is the contributing factor to this negative balance of payments. The balance of goods, imports, and exports improved but more on the negative with transactions with the international business community shifting to the negatives and showing that the business was more on the inside than outside. However, Canada can improve its BOP by improving its manufacturing industry and also promoting innovation and agriculture. This is because they form the major part of raw materials and ideas thus improving exports and lowering imports.

Financial risk management must be undertaken in order to have the economy of a nation moving in a positive direction (Pestieau 2012). Failure to do this would lead to exposure to either credit or market risks. Analyzing financial risks involves analyzing the value of money and cash flows of the country in question. This would prompt assessing the rate of returns and cash flows us either top-down or bottom-up approaches. However, the puzzle around long-term investments is a major question. Both existing and proposed multinational corporations often have such investments. Financing them is always difficult as the government may be forced to borrow in order to finance them adequately (Stern 2013). They can get grants from other financial institutions in support of the investment or get funded by the government. IMF can also lend them loans to help actualize these projects.

This involves the calculation of various cash flow factors that will determine how viable the investment would be in the long run. The time value for money is a factor that must be thoroughly analyzed before injecting any finance into such a major investment. Whether the source of funding is a grant or loan from financial institutions or government agencies, an assessment of the business situation is mandatory. This will include calculating the present value of money and then compared to the future expected return. The present value annuity must also be calculated to get the present return on the investment. Aside from this, the internal rate of return must be taken into perspective to ensure that the profitability of the business is guaranteed. The present value of money is also brought into count.  

(i)

Investment=$200,000 to invest on euro.

If 1 euro=1.38 USD

How many euros can $200,000 do?

200000/1.38=144,727.87 euro.

(ii) interest= 0.07*144,727.87*360/91=40,078.49euro.

(iii)Eurobond is the best alternative for XY corporation since offers lower coupon rates annually

Calculating the bond

This involves the calculations of the rate of return of the bond, the present value, the value of the annuity, and the interest on the present value.

Coupon rate=0.07*2*2500000

                       =$350 000

Present value annuity= 1(1-(1+k-n)/k)

                                       =7(1-(1+0.07)-0.0675/0.07

                                       =$250.045

Euro bond offers the best bond investment compared to the US bond.

In this case, the internal rate of return for the Eurobond would be high as compared to the US bond. This is because the rate of recoup is a little bit lower compared to the US bond.