Deck 18: Long-Term Debt Financing

Question 1

If a U.S.-based MNC issues a bond denominated in euros, the actual financing cost is affected by the euro's value relative to the U.S. dollar during the financing period.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

A U.S.-based MNC 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.

Answer 3

True

Question 4

If an MNC borrows funds in a foreign currency and that currency appreciates over time, the MNC will need fewer funds to cover the coupon or principal payments. (Assume the MNC has no other cash flows in that currency.)

Question 5

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 6

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 7

A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparty could default on its payments.

Question 8

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

Question 9

A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.

Question 10

Parallel loans are particularly attractive when an MNC is conducting a project in a foreign country, will receive cash flows in the foreign currency, and is concerned that the foreign currency will depreciate substantially.

Question 11

The global trade association that is credited with helping to standardize the swaps market is called the International Monetary Fund.

Question 12

If an MNC issues bonds denominated in a foreign currency and that currency depreciates against the MNC's home currency, the funds needed to make coupon payments will increase.

Question 13

When an MNC finances with a floating rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk.

A) interest rate
B) credit
C) exchange rate
D) None of these are correct.

Question 14

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 15

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

Question 16

When estimating the cost of debt financing for a subsidiary, an MNC can use sensitivity analysis and simulation to account for the uncertainty surrounding forecasted exchange rates.

Question 17

Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars.

Question 18

Fixed rate loans have interest rates that are fixed for one year but adjust at the end of each year in response to prevailing interest rates.

Question 19

Even if a foreign interest rate is higher than an MNC's domestic interest rate, the financing costs of issuing a bond denominated in the foreign currency will always be lower than the financing cost of a domestic bond as long as the currency depreciates over the lifetime of the bond.

Question 20

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 21

When a financial institution acts as a(n) ____ to an interest rate swap, it simply arranges a swap between two parties.

A) ultraparty
B) broker
C) counterparty
D) None of these are correct.

Question 22

A U.S. firm receives 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 United States. 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 23

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 these are correct.

Question 24

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 these are correct.

Question 25

Simulation is useful in the debt denomination decision since it can:

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

Question 26

New Hampshire Corp. has decided to issue three-year bonds denominated in 5 million Russian rubles at par. The bonds have a coupon rate of 17 percent. If the ruble 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 percent
B) 23.18 percent
C) 22.36 percent
D) 23.39 percent

Question 27

Lantana Co. pays for many imports denominated in Canadian dollars. It is a major exporter to France and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in:

A) U.S. dollars.
B) euros.
C) Canadian dollars.
D) None of these are correct.

Question 28

​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 29

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 30

Generally, the financing costs associated with a foreign currency-denominated bond will be ____ volatile than the financing costs of a domestic bond because of ____.

A) more; exchange rate movements
B) less; exchange rate movements
C) less; global economic conditions
D) None of these are correct.

Question 31

​The ____ for a given country represents the annualized yield offered on debt for various maturities.

A) ​LIBOR
B) ​yield curve
C) ​parallel loan
D) ​interest rate swap

Question 32

If an MNC finances with a currency different from its invoice currency, it would prefer that the loan be denominated in a currency that:​

A) ​exhibits a low interest rate and is expected to appreciate.
B) ​exhibits a low interest rate and is expected to depreciate.
C) ​exhibits a high interest rate and is expected to depreciate.
D) ​exhibits a high interest rate and is expected to appreciate.

Question 33

____ swaps are often used by companies to hedge against ____ rate risk.

A) Currency; interest
B) Interest rate; interest
C) Interest rate; exchange
D) Currency; exchange
E) Interest rate; interest AND currency; exchange

Question 34

A(n) ____ swap can be established today, but the swap payments start at a specific future point in time.

A) accreting
B) amortizing
C) forward
D) zero-coupon
E) putable

Question 35

​An MNC may be tempted to finance with a maturity that is less than the expected life of the project when the yield curve is:

A) ​flat.
B) ​inverted.
C) ​upward sloping.
D) ​downward sloping.

Question 36

A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise this right if interest rates ____ substantially.

A) floating rate; rise
B) floating rate; fall
C) fixed rate; rise
D) fixed rate; fall
E) None of these are correct.

Question 37

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

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

Question 38

In a(n) ____ swap, the notional value is reduced over time.

A) accreting
B) amortizing
C) forward
D) zero-coupon
E) putable

Question 39

​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 40

If the currency of a foreign currency-denominated bond ____, the funds needed to make coupon payments will ____.

A) appreciates; increase
B) depreciates; decrease
C) appreciates; decrease
D) depreciates; increase
E) appreciates; increase AND depreciates; decrease

Question 41

In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____ 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 42

____ are commonly used to hedge interest rate risk.

A) Currency swaps
B) Parallel loans
C) Interest rate swaps
D) Forward contracts
E) None of these are correct.

Question 43

​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 44

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

A) convert to floating rate payments.
B) hedge exchange rate risk.
C) lock in the interest payments on its debt.
D) eliminate the credit risk of its debt.
Answer Key

Question 45

Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on bonds issued in those countries are ____.

A) low; high
B) high; low
C) high; high
D) None of these are correct.

Question 46

​A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing:

A) ​U.S. dollars.
B) ​Canadian dollars.
C) ​Chinese yuan.
D) ​a combination of Canadian dollars and Chinese yuan.

Question 47

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 euros.

Question 48

The yields offered on newly issued bonds tend to be:

A) lower in less developed countries where labor costs are low.
B) relatively high in countries such as Japan and the United States because the credit risk premium is much higher there than in other countries.
C) the same across countries at a given point in time.
D) None of these are correct.

Question 49

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

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

Question 50

An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The bonds have a coupon rate of 15 percent. 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 percent.
B) 12.5 percent.
C) 15.0 percent.
D) None of these are correct.

Question 51

A(n) _____ yield curve for a country means that annualized yields are ____ for short-term debt than for long-term debt.

A) upward-sloping; higher
B) flat; lower
C) downward-sloping; lower
D) upward-sloping; lower

Question 52

Assume a U.S.-based subsidiary wants to raise $1 million 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 million needed.

A) 50,000,000
B) 20,000
C) 1,000,000
D) None of these are correct.