Equation $1$ to find each forward rate. With the forward rates, you can convert the cash flows and

find the implied U$.$S$.$ dollar rate.

#$2$: Why are the euro and British pound issues notably cheaper?

To answer this question, you need to complete Exhibit TN$2.$ The first part of Exhibit TN$2$

calculates the credit spread implied by the Vale coupon rates $($local currency rates, since the

bonds are issued at par$).$ One could, of course, calculate a credit spread in U$.$S$.$ dollars for each

of the hedged costs, but these would just reflect the hedged rate differences. The point of

looking at each market is to think about how Vale is viewed relative to alternatives.

In the lower part of Exhibit TN$2,$ the implied real rate of return in each of the countries is

calculated. This does not speak to the Vale issue in particular but to the market in general.

Another approach to exploring what drives the preference across issues is to look at the credit

spread of the Vale issue in each currency against other comparable companies. As with the

credit spread analysis is Exhibit TN$2,$ the purpose is to identify whether the preference for one

issue over another is driven by broad$-$market$-$ or firm$-$specific factors.

Exhibit TN$1$

VALE SA

Hedged Cost of Funds Calculations

$($annual payments assumed for U$.$S$.$ dollar issue$)$

Yield local

U$.$S$.$ Dollar

$5\mathrm{.}240\%$

U$.$S$.$ Dollar

Issued

$,1,000\mathrm{.}00$

$,(52\mathrm{.}40)$

$(52\mathrm{.}40)$

$(52\mathrm{.}40)$

$(52\mathrm{.}40)$

$(52\mathrm{.}40)$

$(52\mathrm{.}40)$

$(52\mathrm{.}40)$

$(1,052\mathrm{.}40)$

$5\mathrm{.}240\%$

Euro

$4\mathrm{.}375\%$

Euro Cash

Flow

$750\mathrm{.}00$

$(32\mathrm{.}81)$

$(32\mathrm{.}81)$

$(32\mathrm{.}81)$

$(32\mathrm{.}81)$

$(32\mathrm{.}81)1\mathrm{.}3886$

$(32\mathrm{.}81)1\mathrm{.}3997$

$(32\mathrm{.}81),1\mathrm{.}4097$

$(782\mathrm{.}81),1\mathrm{.}4188$

U$.$S$.$ Dollar

Rate

$1\mathrm{.}3656$

$1\mathrm{.}3634$

$1\mathrm{.}3684$

$1\mathrm{.}3776$

Cash Flow

$(44\mathrm{.}81)$

$(44\mathrm{.}74)$

$(44\mathrm{.}90)$

$(45\mathrm{.}20)$

$(45\mathrm{.}56)$

$(45\mathrm{.}93)$

$(46\mathrm{.}25)$

$(1,110\mathrm{.}67)$

$4\mathrm{.}75\%$

British Pound

$5\mathrm{.}475\%$

British

Pound

Rate

$1\mathrm{.}5296$

$1\mathrm{.}5196$

$1\mathrm{.}5124$

$1\mathrm{.}5034$

$1\mathrm{.}4947$

$1\mathrm{.}4900$

$1\mathrm{.}4853$

$1\mathrm{.}4769$

$1\mathrm{.}4642$

U$.$S$.$Dollar

Cash Flow

$(38\mathrm{.}33)1\mathrm{.}5196$

$(38\mathrm{.}33),1\mathrm{.}5124,(57\mathrm{.}96)$

$(38\mathrm{.}33),1\mathrm{.}5034,(57\mathrm{.}62)$

$(38\mathrm{.}33),1\mathrm{.}4947,(57\mathrm{.}28)$

$(38\mathrm{.}33),1\mathrm{.}4900,(57\mathrm{.}10)$

$(38\mathrm{.}33),1\mathrm{.}4853,(56\mathrm{.}92)$

$(38\mathrm{.}33),1\mathrm{.}4769,(56\mathrm{.}60)$

$(738\mathrm{.}33),1\mathrm{.}4642,(1,081\mathrm{.}02)$

Yield hedged

$4\mathrm{.}90\%$

Data source: Vale $20-$F filings, $2009.$