Solution manual financial management

Embed Size px. Start on. Show related SlideShares at end. WordPress Shortcode. Share Email. Top clipped slide. Download Now Download Download to read offline. TestBankTown Follow. Solution Manual for essentials of investments 11th edition by bodie, kane, ma Related Books Free with a 30 day trial from Scribd.

Dry: A Memoir Augusten Burroughs. Related Audiobooks Free with a 30 day trial from Scribd. Chapter 3 Understanding Financial Statements To find net income, we must subtract all relevant expenses from revenues: cost of goods sold, operating expenses, interest expense, and taxes. Following the template from Checkpoint 3.

However, earnings per share is based on net income, not reinvested earnings. Merry Soundtracks, Inc. Using the corporate tax rates given in Section 3. The chart above is very close to that in Section 3. Sanderson, Inc. The statement below outlines the situation of the Robbins Corporation. It may want to search for operating efficiencies to improve its profit margins. Its interest expense, in particular, seem high. For J. Hulett, Inc. The statement below shows how we can compute the taxable income for G.

Edwin, Inc. Meyer, Inc. Additional order info. Pearson offers affordable and accessible purchase options to meet the needs of your students. Connect with us to learn more. We're sorry! We don't recognize your username or password.

Please try again. As a result, the U. This means that the price level will tend to fall in the U. Consequently, the U. This change will improve U. Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the franc is pegged to gold at 12 francs per ounce. This, of course, implies that the equilibrium exchange rate should be two francs per pound.

If the current market exchange rate is 2. What would be the effect of shipping costs? Answer: Suppose that you need to buy 6 pounds using French francs. If you buy 6 pounds directly in the foreign exchange market, it will cost you Alternatively, you can first buy an ounce of gold for 12 francs in France and then ship it to England and sell it for 6 pounds. In this case, it only costs you 12 francs to buy 6 pounds. It is thus beneficial to ship gold due to the overpricing of the pound. Of course, you can make an arbitrage profit by selling 6 pounds for The arbitrage profit will be 1.

So far, we assumed that shipping costs do not exist. If it costs more than 1. Discuss the advantages and disadvantages of the gold standard.

Answer: The advantages of the gold standard include: I since the supply of gold is restricted, countries cannot have high inflation; 2 any BOP disequilibrium can be corrected automatically through cross-border flows of gold. On the other hand, the main disadvantages of the gold standard are: I the world economy can be subject to deflationary pressure due to restricted supply of gold; ii the gold standard itself has no mechanism to enforce the rules of the game, and, as a result, countries may pursue economic policies like de-monetization of gold that are incompatible with the gold standard.

What were the main objectives of the Bretton Woods system? Answer: The main objectives of the Bretton Woods system are to achieve exchange rate stability and promote international trade and development. One can say that the Bretton Woods system was programmed to an eventual demise. Comment on this proposition. Answer: The answer to this question is related to the Triffin paradox. Under the gold-exchange system, the reserve-currency country should run BOP deficits to supply reserves to the world economy, but if the deficits are large and persistent, they can lead to a crisis of confidence in the reserve currency itself, eventually causing the downfall of the system.

Explain how the special drawing rights SDR is constructed. Also, discuss the circumstances under which the SDR was created. The SDR is a basket currency comprised of five major currencies, i. The weights for different currencies tend to change over time, reflecting the relative importance of each currency in international trade and finance. Answer: EMS was launched in in order to I establish a zone of monetary stability in Europe, ii coordinate exchange rate policies against the non-EMS currencies, and iii pave the way for the eventual European monetary union.

There are arguments for and against the alternative exchange rate regimes. List the advantages of the flexible exchange rate regime. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime. Answer: a. The advantages of the flexible exchange rate system include: I automatic achievement of balance of payments equilibrium and ii maintenance of national policy autonomy.

If exchange rates are fluctuating randomly, that may discourage international trade and encourage market segmentation. This, in turn, may lead to suboptimal allocation of resources. Economic agents can hedge exchange risk by means of forward contracts and other techniques. In addition, under a fixed exchange rate regime, governments often restrict international trade in order to maintain the exchange rate.

This is a self- defeating measure. In an integrated world financial market, a financial crisis in a country can be quickly transmitted to other countries, causing a global crisis. What kind of measures would you propose to prevent the recurrence of a Asia-type crisis.

Second, international institutions like IMF and the World Bank should monitor problematic countries more closely and provide timely advice to those countries. Countries should be required to fully disclose economic and financial information so that devaluation surprises can be prevented.

Third, countries should depend more on domestic savings and long-term foreign investments, rather than short-term portfolio capital. There can be other suggestions. Answer: A good international monetary system should provide I sufficient liquidity to the world economy, ii smooth adjustments to BOP disequilibrium as it arises, and iii safeguard against the crisis of confidence in the system.

Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so. Answer: Once capital markets are integrated internationally, vast amounts of money may flow in and out of a country in a short time period. This will make it very difficult for the country to maintain a fixed exchange rate. When the euro was introduced in January , the United Kingdom was conspicuously absent from the list of European countries adopting the common currency.

Although the current Labor government led by Prime Minister Tony Blair appears to be in favor of joining the euro club, it is not clear at the moment if that will actually happen. The opposition Tory party is not in favor of adopting the euro and thus giving up monetary sovereignty of the country.

The public opinion is also divided on the issue. Whether the United Kingdom will eventually join the euro club is a matter of considerable importance for the future of European Union as well as that of the United Kingdom.

The joining of the United Kingdom with its sophisticated finance industry will most certainly help propel the euro into a global currency status rivaling the U. The United Kingdom on its part will firmly join the process of economic and political unionization of Europe, abandoning its traditional balancing role.

Investigate the political, economic and historical situations surrounding the British participation in the European economic and monetary integration and write your own assessment of the prospect of British joining the euro club.

In dong so, assess from the British perspective, among other things, 1 potential benefits and costs of adopting the euro, 2 economic and political constraints facing the country, and 3 the potential impact of British adoption of the euro on the international financial system, including the role of the U. Whether the U. Recently, the U. Economic conditions in terms of government budgets, interest rates, and inflation rate are becoming similar to those in euro- zone countries.

On an economic ground, this convergence is creating a condition that is conducive to U. Since many political leaders in France and Germany consider adoption of the euro as a step toward the European political union, the U.

Once the U. Define the balance of payments. Second, BOP data can be used to evaluate the performance of the country in international economic competition. The United States has experienced continuous current account deficits since the early s.

What do you think are the main causes for the deficits? What would be the consequences of continuous U. Answer: The current account deficits of U. In contrast to the U. What could be the main causes for these surpluses? Is it desirable to have continuous current account surpluses? Massive capital exports by Japan prevented yen from appreciating more than it did.

Continuous current account surpluses disrupt free trade by promoting protectionist sentiment in the deficit country. In reality, the causality may be running in the opposite direction: U. Suppose foreigners find the U. This capital inflow will strengthen the dollar, hurting the U. Explain how a country can run an overall balance of payments deficit or surplus. Answer: A country can run an overall BOP deficit or surplus by engaging in the official reserve transactions.

Explain official reserve assets and its major components. Answer: Official reserve assets are those financial assets that can be used as international means of payments. Currently, official reserve assets comprise: I gold, ii foreign exchanges, iii special drawing rights SDRs , and iv reserve positions with the IMF.

Foreign exchanges are by far the most important official reserves. Explain how to compute the overall balance and discuss its significance.

Answer: The overall BOP is determined by computing the cumulative balance of payments including the current account, capital account, and the statistical discrepancies.

Since the early s, foreign portfolio investors have purchased a significant portion of U. Treasury bonds, U. BOP will improve in the short run. But in the long run, U. BOP may deteriorate because the U. If foreign funds are used productively and contributes to the competitiveness of U. BOP may improve in the long run. Describe the balance of payments identity and discuss its implications under the fixed and flexible exchange rate regimes. Under the pure flexible exchange rate regime, central banks do not engage in official reserve transactions.

Thus, the overall balance must balance, i. Under the fixed exchange rate regime, however, a country can have an overall BOP surplus or deficit as the central bank will accommodate it via official reserve transactions. Exhibit 3. Explain how this can happen?

Answer: In , the U. Explain how each of the following transactions will be classified and recorded in the debit and credit of the U. Treasury bonds and pays out of its bank account kept in New York City. Construct the balance of payment table for Japan for the year of which is comparable in format to Exhibit 3. You may consult International Financial Statistics published by IMF or research for useful websites for the data yourself.

These events also brought about a severe recession and higher unemployment in Mexico. Since the devaluation, however, the trade balance has improved. Investigate the Mexican experiences in detail and write a report on the subject.

The Mexican government did not want the peso devaluation before the Presidential election held in If the Mexican peso had been allowed to gradually depreciate against the major currencies, the peso crisis could have been prevented.

The key lessons that can be derived from the peso crisis are: First, Mexico depended too much on short-term foreign portfolio capital which is easily reversible for its economic growth. The country perhaps should have saved more domestically and depended more on long-term foreign capital.

This can be a valuable lesson for many developing countries. Second, the lack of reliable economic information was another contributing factor to the peso crisis.

The Salinas administration was reluctant to fully disclose the true state of the Mexican economy. If investors had known that Mexico was experiencing serious trade deficits and rapid depletion of foreign exchange reserves, the peso might have been gradually depreciating, rather than suddenly collapsed as it did.

The transparent disclosure of economic data can help prevent the peso-type crisis. Third, it is important to safeguard the world financial system from the peso-type crisis. To this end, a multinational safety net needs to be in place to contain the peso-type crisis in the early stage. Give a full definition of the market for foreign exchange. Answer: Broadly defined, the foreign exchange FX market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.

What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange? Answer: The market for foreign exchange can be viewed as a two-tier market.

One tier is the wholesale or interbank market and the other tier is the retail or client market. International banks provide the core of the FX market. They stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, corporations or individuals, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange.

Retail transactions account for only about 16 percent of FX trades. The other 84 percent is interbank trades between international banks, or non-bank dealers large enough to transact in the interbank market. Who are the market participants in the foreign exchange market?

Answer: The market participants that comprise the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. Approximately banks worldwide make a market in foreign exchange, i. These international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, whose size and frequency of trades make it cost- effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs.

FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers.

How are foreign exchange transactions between international banks settled? Answer: The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts.

The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, consider a U. The U. If the U. What is meant by a currency trading at a discount or at a premium in the forward market? Answer: The forward market involves contracting today for the future purchase or sale of foreign exchange.

The forward price may be the same as the spot price, but usually it is higher at a premium or lower at a discount than the spot price. Why does most interbank currency trading worldwide involve the U. Answer: Trading in currencies worldwide is against a common currency that has international appeal.

That currency has been the U. However, the deutsche mark and Japanese yen have started to be used much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies. Answer: Swap transactions provide a means for the bank to mitigate the currency exposure in a forward trade. A swap transaction is the simultaneous sale or purchase of spot foreign exchange against a forward purchase or sale of an approximately equal amount of the foreign currency.

To illustrate, suppose a bank customer wants to buy dollars three months forward against British pound sterling. The bank can handle this trade for its customer and simultaneously neutralize the exchange rate risk in the trade by selling borrowed British pound sterling spot against dollars.

The bank will lend the dollars for three months until they are needed to deliver against the dollars it has sold forward. The British pounds received will be used to liquidate the sterling loan. Answer: The trader must think the Canadian dollar is going to depreciate against the U. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity? Answer: Triangular arbitrage is the process of trading out of the U.

The purpose is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.

Using Exhibit 4. Use the most current European term quotes to calculate the cross-rates so that the triangular matrix result is similar to the portion above the diagonal in Exhibit 4.

We will use the top formula that uses American term forward exchange rates. Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points. Spot 1. Using the spot and outright forward quotes in problem 3, determine the corresponding bid-ask spreads in points.

Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting DM1. Show how you can make a triangular arbitrage profit by trading at these prices. Ignore bid-ask spreads for this problem.

What happens if you initially sell dollars for Swiss francs? Thus, it is necessary to conduct the triangular arbitrage in the correct order. This is an equilibrium rate at which a triangular arbitrage profit will not exist. The student can determine this for himself.

A profit results from the triangular arbitrage when dollars are first sold for marks, because Swiss francs are purchased for marks at too low a rate in comparison to the equilibrium cross-rate, i. Shrewsbury Herbal Products, located in central England, close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines.

Their products are marketed all over the United Kingdom and in many parts of continental Europe as well. Shrewsbury Herbal generally invoices in British pound sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Peters also learns that the day forward rates for the pound and the French franc versus the U. What would you do if you were Mr. Note to Instructor: This elementary case provides an intuitive look at hedging exchange rate exposure. Students should not have difficulty with it even though hedging will not be formally discussed until Chapter The case is consistent with the discussion that accompanies Exhibit 4.

Suppose Shrewsbury sells at a twenty percent markup. This seems rather unlikely. Nevertheless, a ten percent appreciation of the pound FF7. Give a full definition of arbitrage. Answer: Arbitrage can be defined as the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits.

Discuss the implications of the interest rate parity for the exchange rate determination. The exchange rate is thus determined by the relative interest rates, and the expected future spot rate, conditional on all the available information, I t, as of the present time.

One thus can say that expectation is self-fulfilling. Since the information set will be continuously updated as news hit the market, the exchange rate will exhibit a highly dynamic, random behavior. Explain the conditions under which the forward exchange rate will be an unbiased predictor of the future spot exchange rate.

Answer: The forward exchange rate will be an unbiased predictor of the future spot rate if I the risk premium is insignificant and ii foreign exchange markets are informationally efficient. Explain the purchasing power parity, both the absolute and relative versions.

What causes the deviations from the purchasing power parity? PPP can be violated if there are barriers to international trade or if people in different countries have different consumption taste. PPP is the law of one price applied to a standard consumption basket.

Answer: If exchange rate changes satisfy PPP, competitive positions of countries will remain unaffected following exchange rate changes. Otherwise, exchange rate changes will affect relative competitiveness of countries. Explain and derive the international Fisher effect. Answer: The international Fisher effect can be obtained by combining the Fisher effect and the relative version of PPP in its expectational form. Assuming that the real interest rate is the same between the two countries, i.

Researchers found that it is very difficult to forecast the future exchange rates more accurately than the forward exchange rate or the current spot exchange rate. How would you interpret this finding? Answer: This implies that exchange markets are informationally efficient. Thus, unless one has private information that is not yet reflected in the current market rates, it would be difficult to beat the market. Explain the random walk model for exchange rate forecasting. Can it be consistent with the technical analysis?

Answer: The random walk model predicts that the current exchange rate will be the best predictor of the future exchange rate. An implication of the model is that past history of the exchange rate is of no value in predicting future exchange rate. The model thus is inconsistent with the technical analysis which tries to utilize past history in predicting the future exchange rate. Derive and explain the monetary approach to exchange rate determination. Answer: The monetary approach is associated with the Chicago School of Economics.

It is based on two tenets: purchasing power parity and the quantity theory of money. The theory holds that what matters in exchange rate determination are: 1. The relative money supply, 2. The relative velocities of monies, and 3. The relative national outputs.

Currently, the spot exchange rate is DM1. The treasurer of IBM does not wish to bear any exchange risk. You have enough cash at your bank in New York City, which pays 0.

In London, the money market interest rate is 2. There are two alternative ways of paying for your Jaguar. Evaluate each payment method. Which method would you prefer? The three-month interest rate is 8. Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

Explain how the IRP will be restored as a result of covered arbitrage activities. Following the arbitrage transactions described above, The dollar interest rate will rise; The pound interest rate will fall; The spot exchange rate will rise; The forward exchange rate will fall.

These adjustments will continue until IRP holds. Suppose that the current spot exchange rate is FF6. The three-month interest rate is 5. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.

Also determine the magnitude of arbitrage profit. Assume that you want to realize profit in terms of French francs. Show the covered arbitrage process and determine the arbitrage profit in French francs. Note that only step 4 is different.

In the issue of October 23, , the Economist reports that the interest rate per annum is 5. Why do you think the interest rate is so high in Turkey? Based on the reported interest rates, how would you predict the change of the exchange rate between the U. Solution: A high Turkish interest rate must reflect a high expected inflation in Turkey. As of November 1, , the exchange rate between the Brazilian real and U.

The consensus forecast for the U. How would you forecast the exchange rate to be at around November 1, ? Solution: Since the inflation rate is quite high in Brazil, we may use the purchasing power parity to forecast the exchange rate.

Briefly discuss some of the services that international banks provide their customers and the market place. Answer: International banks can be characterized by the types of services they provide that distinguish them from domestic banks.

Foremost, international banks facilitate the imports and exports of their clients by arranging trade financing. Additionally, they serve their clients by arranging for foreign exchange necessary to conduct cross-border transactions and make foreign investments and by assisting in hedging exchange rate risk in foreign currency receivables and payables through forward and options contracts.

Since international banks have established trading facilities, they generally trade foreign exchange products for their own account.

Two major distinguishing features between domestic banks and international banks are the types of deposits they accept and the loans and investments they make. Large international banks both borrow and lend in the Eurocurrency market.

Moreover, depending upon the regulations of the country in which it operates and its organizational type, an international bank may participate in the underwriting of Eurobonds and foreign bonds. In the United States, only investment banks and the investment banking operations of bank holding companies are allowed to participate in the underwriting of international bonds. International banks frequently provide consulting services and advice to their clients in the areas of exchange hedging strategies, interest rate and currency swap financing, and international cash management services.

Not all international banks provide all services. Banks that do provide a majority of these services are known as universal banks or full service banks. Briefly discuss the various types of international banking offices. Answer: The services and operations which an international bank undertakes is a function of the regulatory environment in which the bank operates and the type of banking facility established. A correspondent bank relationship is established when two banks maintain a correspondent bank account with one another.

It is a way for the parent bank to provide its MNC clients with a level of service greater than that provided through merely a correspondent relationship. A foreign branch bank operates like a local bank, but legally it is a part of the parent bank. As such, a branch bank is subject to the banking regulations of its home country and the country in which it operates.

The primary reason a parent bank would establish a foreign branch is that it can provide a much fuller range of services for its MNC customers through a branch office than it can through a representative office. A subsidiary bank is a locally incorporated bank that is either wholly owned or owned in major part by a foreign subsidiary.

An affiliate bank is one that is only partially owned, but not controlled by its foreign parent. Both subsidiary and affiliate banks operate under the banking laws of the country in which they are incorporated. Edge Act banks are federally chartered subsidiaries of U. The purpose of the amendment was to allow U. Federal Reserve Regulation K allows Edge Act banks to accept foreign deposits, extend trade credit, finance foreign projects abroad, trade foreign currencies, and engage in investment banking activities with U.

As such, Edge Act banks do not compete directly with the services provided by U. Edge Act banks are not prohibited from owning equity in business corporations as are domestic commercial banks.

Thus, it is through the Edge Act that U. An offshore banking center is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country. Offshore banks operate as branches or subsidiaries of the parent bank.

The primary activities of offshore banks are to seek deposits and grant loans in currencies other than the currency of the host government. IBFs operate as foreign banks in the U.

IBFs were established largely as a result of the success of offshore banking. The Federal Reserve desired to return a large share of the deposit and loan business of U. How does the deposit-loan rate spread in the Eurodollar market compare with the deposit-loan rate spread in the domestic U. That is, in the Eurodollar market the deposit rate is greater than the deposit rate of dollars in the U. The Eurodollar market can operate at a lower cost than can the U.

What is the difference between the Euronote market, the Euro-medium-term-note market, and the Eurocommercial paper market?

Euronotes are sold at a discount from face value, and pay back the full face value at maturity. Euronotes typically have maturities of from three to six months. Euro-medium-term notes Euro MTNs are typically fixed-rate notes issued by a corporation with maturities ranging from less than a year to about 10 years.

Like fixed-rate bonds, Euro-MTNs have a fixed maturity and pay coupon interest at periodic dates. Unlike a bond issue, in which the entire issue is brought to market at once, permission is received for a Euro- MTN issue which is then partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis. Eurocommercial paper is an unsecured short-term promissory note issued by a corporation or a bank and placed directly with the investment public through a dealer.

Like Euronotes, Eurocommercial paper is sold at a discount from face value. Maturities typically range from one to six months. Briefly discuss the cause and the solution s to the international bank crisis involving less developed countries. Answer: The international debt crisis began on August 20, when Mexico asked more than U. Soon Brazil, Argentina and more than 20 other developing countries announced similar problems in making the debt service on their bank loans.

The international debt crisis had oil as its source. Throughout this time period, OPEC raised oil prices dramatically and amassed a tremendous supply of U. Eurobanks were faced with a huge problem of lending these funds in order to generate interest income to pay the interest on the deposits.

Third World countries were only too eager to assist the equally eager Eurobankers in accepting Eurodollar loans that could be used for economic development and for payment of oil imports. The high oil prices were accompanied by high interest rates, high inflation, and high unemployment during the period. Soon, thereafter, oil prices collapsed and the crisis was on. Today, most debtor nations and creditor banks would agree that the international debt crisis is effectively over.

Treasury Secretary Nicholas F. Brady of the Bush Administration is largely credited with designing a strategy in the spring of to resolve the problem. Three important factors were necessary to move from the debt management stage, employed over the years to keep the crisis in check, to debt resolution. First, banks had to realize that the face value of the debt would never be repaid on schedule.

Second, it was necessary to extend the debt maturities and to use market instruments to collateralize the debt. Third, the LDCs needed to open their markets to private investment if economic development was to occur. Debt-for-equity swaps helped pave the way for an increase in private investment in the LDCs. However, monetary and fiscal reforms in the developing countries and the recent privatization trend of state owned industry were also important factors.

The second alternative called for an extension the debt maturities by 25 to 30 years and the purchase by the debtor nation of zero- coupon U. Treasury bonds with a corresponding maturity to guarantee the bonds and make them marketable. These bonds have come to be called Brady bonds. What warning did David Hume, the 18th-century Scottish philosopher-economist, give about lending to sovereign governments? Humphrey in The Wall Street Journal.

Hume thought no good could result from borrowing: If the abuses of treasures [held by the state] be dangerous by engaging the state in rash enterprise in confidence of its riches; the abuses of mortgaging are more certain and inevitable: poverty, impotence, and subjection to foreign powers.

The practice, therefore, of contracting debt will almost infallibly be abused in every government.