Deck 18: Long-Term Financing

Question 1

Simulation is useful in the bonddenomination decision since it can:

A) precisely compute the cost of financing with bonds denominated in a single foreign currency.
B) precisely compute the cost of financing with bonds denominated in a portfolio of foreign currencies.
C) assess the probability that a bond denominated in a foreign currency will be less costly than a bond denomin ated in the home currency.
D) A and B

Answer 1

C

Question 2

Ideally,a firm desires to denominate bonds in a currency that:

A) exhibits a low interest rate and is expected to appreci ate.
B) exhibits a low interest rate and is expected to depreci ate.
C) exhibits a high interest rate and is expected to depreci ate.
D) exhibits a high interest rate and is expected to appreci ate.

Answer 2

B

Question 3

An interest rate swap is commonly used by an issuer of fixed-rate bonds to:

A) convert to floating-rate debt.
B) hedge exchange rate risk.
C) lock in the interest payments on debt.
D) remove the default risk of its debt.

Answer 3

A

Question 4

In a(an)___________ swap,two parties agree to exchange payments associated with bonds;in a(an)____________ swap,two parties agree to periodically exchange foreign currencies.

A) interest rate;currency
B) currency;interest rate
C) interest rate;interest rate
D) currency;currency

Question 5

The yields offered on newly issued bonds denominated in dollars have:

A) consistently increased over the last 10 years.
B) consistently decreased over the last 10 years.
C) remained stable.
D) none of the above

Question 6

Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in Pakistani rupees (PKR).The current exchange rate of the rupee is $.02.Thus,the MNC needs ___________ rupees to obtain the $1,000,000 needed.

A) 50,000,000
B) 20,000
C) 1,000,000
D) none of the above

Question 7

If the currency denominating a foreign bond depreciates against the firm's home currency,the funds needed to make coupon payments will increase.

Question 8

A U.S.firm has a Canadian subsidiary that remits some of its earnings to the parent on an annual basis.  The firm has no other foreign business.  The firm could best reduce its exposure to exchange rate risk by issuing bonds denominated in:

A) U.S. dollars.
B) Canadian dollars.
C) multiple currencies.
D) a unit of account such as the SDR.

Question 9

_____________ are beneficial because they may reduce transaction costs.However,MNCs may not be able to obtain all the funds that they need.

A) Private placements
B) Domestic equity offerings
C) Global equity offerings
D) Global debt offerings

Question 10

Good Company prefers variable to fixed rate debt.Bad Company prefers fixed to variable rate debt.Assume the following information for Good and Bad Companies:
Fixed Rate Bond Variable Rate Bond
Good Company 10% LIBOR + 1%
Bad Company 12% LIBOR + 1.5%
Given this information:

A) an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.
B) an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
C) an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
D) none of the above

Question 11

A U.S.firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland.  It has no other business outside the U.S.  It could best reduce its exposure to exchange rate risk by:

A) issuing Swiss franc denominated bonds.
B) purchasing Swiss franc denominated bonds.
C) purchasing U.S. dollar denominated bonds.
D) issuing U.S. dollar denominated bonds.

Question 12

When ignoring exchange rate risk,bond yields:

A) are the same for all currencies.
B) are consistently higher for all non U.S. bonds than U.S. bonds.
C) are consistently lower for all non U.S. bonds than U.S. bonds.
D) none of the above

Question 13

If U.S.firms issue bonds in _______,the dollar outflows to cover fixed coupon payments increase as the dollar _______.

A) a foreign currency;weakens
B) dollars;strengthens
C) a foreign currency;strengthens
D) dollars;weakens

Question 14

An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP)at par.The bonds have a coupon rate of 15%.If the peso remains stable at its current level of $.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity,the financing cost to the MNC will be:

A) 10.0%.
B) 12.5%.
C) 15.0%.
D) none of the above

Question 15

Minnie Corp.has decided to issue three-year bonds denominated in 5,000,000 Slovakian koruna (SKK)at par.The bonds have a coupon rate of 17%.If the koruna is expected to appreciate from its current level of $.03 to $.032,$.034,and $.035 in years 1,2,and 3,respectively,what is the financing cost of these bonds

A) 17%.
B) 23.18%.
C) 22.36%.
D) 23.39%.

Question 16

A currency swap between two firms of different countries enables the exchange of __________ for ___________ at periodic intervals.

A) stock;one currency
B) stock;a portfolio of foreign currencies
C) one currency;stock options
D) one currency;another currency

Question 17

An interest rate swap between two firms of different countries enables the exchange of __________ for __________.

A) fixed-rate payments;floating-rate payments
B) stock;interest deductions on taxes
C) interest payments on loans;ownership of debt of less developed countries
D) interest payments on loans;stock

Question 18

A U.S.firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:

A) invoicing its exports in U.S. dollars.
B) requesting that any imports ordered by the firm be invoiced in U.S. dollars.
C) invoicing its exports in euros.
D) requesting that any imports ordered by the firm be invoiced in the currency denominating the bonds.

Question 19

Eurobonds are often issued with a floating coupon rate that is tied to LIBOR.

Question 20

Firm "X" conducts all business transactions in U.S.dollars.  If it issues a currency cocktail bond,it can:

A) reduce exchange rate risk relative to issuing a bond denominated in U.S. dollars.
B) reduce exchange rate risk relative to issuing a bond denominated in a single foreign currency.
C) A and B
D) none of the above

Question 21

If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond denominated in euros,it would sell euros forward.

Question 22

If the foreign currency that was borrowed appreciates over time,an MNC will need fewer funds to cover the coupon or principal payments.[Assume the MNC has no other cash flows in that currency.]

Question 23

Some firms may be uncomfortable issuing bonds denominated in foreign currencies because exchange rates are __________ difficult to predict over ________ time horizons.

A) less;long
B) more;short
C) more;long
D) none of the above

Question 24

In a(n)___________ swap,the fixed rate payer has the right to terminate the swap.

A) callable
B) putable
C) amortizing
D) zero-coupon

Question 25

In general,the _________ rate payer in a plain vanilla swap believes interest rates are going to _______.

A) fixed;decline
B) floating;decline
C) floating;increase
D) none of the above

Question 26

U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offset exposure to exchange rate risk by issuing bonds denominated in the subsidiary's local currency.

Question 27

In a(n)_________ swap,the notional value is increased over time.

A) amortizing
B) basis
C) zero-coupon
D) accretion

Question 28

Because bonds denominated in foreign currencies rarely have lower yields,U.S.corporations rarely consider issuing bonds denominated in those currencies.

Question 29

When financing international operations,MNCs typically will not use a maturity that _________ the expected life of the business in that country.

A) is less than
B) exceeds
C) is the same as
D) none of the above

Question 30

Most MNCs obtain equity funding:

A) in foreign countries.
B) in their home country.
C) through global offerings.
D) through private placements.

Question 31

When an MNC financesin a currency that matches its cash inflows using a relatively _______ maturity,the MNC is exposed to __________ risk.

A) short;interest rate
B) long;interest rate
C) short;exchange rate
D) none of the above

Question 32

A ___________ gives its owner the right to enter into a swap.

A) basis swap
B) swaption
C) callable swap
D) putable swap

Question 33

An MNC issuing pound-denominated bonds may be completely insulated from exchange rate risk associated with the bond if its foreign subsidiary makes the coupon and principal payments of the bond with its pound receivables.

Question 34

As a ________ to an interest rate swap,a financial institution simply arranges a swap between two parties.

A) ultraparty
B) broker
C) counterparty
D) none of the above

Question 35

Some MNCs use a country's yield curve to compare annualized rates among debt maturities,so that they can choose a maturity that has a relatively low rate.

Question 36

The United States typically has a(n)___________-sloping yield curve,which means that the annualized yields are ________ for short-term debt than for long-term debt.

A) downward;higher
B) downward;lower
C) upward;higher
D) upward;lower

Question 37

A floating coupon rate can be an advantage to the bond issuer during periods of increasing interest rates.

Question 38

MNCs can use __________ to reduce exchange rate risk.This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future.

A) forward contracts
B) currency swaps
C) parallel loans
D) none of the above

Question 39

The actual financing cost of a U.S.corporation issuing a bond denominated in euros is affected by the euro's value relative to the U.S.dollar during the financing period.

Question 40

Countries where bond yields are ________ tend to have a _______ risk-free interest rate.

A) low;high
B) high;low
C) high;high
D) none of the above

Question 41

A back-to-back (also called parallel)loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.

Question 42

Currency swaps,whereby two parties exchange currencies at a specified point in time for a specified price,are often used by MNCs to hedge against interest rate risk.

Question 43

Many MNCs simultaneously swap interest payments and currencies.

Question 44

Two limitations of interest rate swaps are that there is a cost of time and resources associated with searching for a suitable partner and that there is a risk to each swap participant that the counterparticipant could default on his payments.

Question 45

Since yield curves are identical across countries,MNCs rarely consider them when deciding on the maturity of bonds denominated in a foreign currency.