Question 1

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:

Accepted Answer

Since the bonds are issued at par, and since the exchange rate remains stable over the life of the bonds and the bonds are held until maturity, the financing cost will be exactly the coupon rate of the bond.

Question 2

New Hampshire Corp. has decided to issue three-year bonds denominated in 5,000,000 Russian rubles at par. The bonds have a coupon rate of 17%. 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?

Accepted Answer

$\begin{array} { l r r r r } 
& & & & \text { Annual Cost of } \
\text { Payments in rubles } & \underline { \text { Year 1 } } & \underline { \text { Year } \mathbf { 2 } } & \underline { \text { Year } \mathbf { 3 } } & \underline { \text { Financing } } \
\text { Forecasted exchange rate of ruble } & 850,000 & \$ 50,000 & 5,850,000 & \
\text { Payments in dollars } & \$ .032 & \$ .034 & \$ .035 & \
& \$ 27,200 & \$ 28,900 & \$ 204,750 & 23.39 \%
\end{array}$

Question 3

The yields offered on newly issued bonds tend to be:

Accepted Answer

Yields on newly issued bonds vary across countries due to differences in credit risk, inflation expectations, and economic conditions, so none of the given statements accurately describe the situation.

Question 4

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

Accepted Answer

Floating-rate bonds typically have a coupon rate that is tied to a benchmark rate, such as LIBOR or the prime rate, which can adjust periodically throughout the life of the bond. This helps to protect the issuer from interest rate fluctuations and can provide investors with a more stable source of income.

Question 5

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

Accepted Answer

An interest rate swap allows an issuer of fixed-rate bonds to convert their fixed-rate debt into floating-rate debt, which can be beneficial if they expect interest rates to decrease.

Question 6

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.

Accepted Answer

The answer of In a(n) ____ swap, two parties agree...

Question 7

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:

Accepted Answer

The answer of A U.S. firm has a Canadian subsidiary...

Question 8

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:

Accepted Answer

Issuing Swiss franc-denominated bonds would create a natural hedge, as the firm would have both inflows and outflows in Swiss francs, reducing its exposure to exchange rate fluctuations.

Question 9

When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the MNC's exposure to exchange rate risk can be minimized if:

Accepted Answer

By obtaining a peso-denominated loan, the subsidiary matches its financing with its local currency, reducing the exchange rate risk for the MNC.

Question 10

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.

Accepted Answer

$1,000,000/$.02 = PKR50,000,000

Question 11

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

Accepted Answer

Invoicing exports in euros would provide a natural hedge against exchange rate risk, as the firm would be receiving payments in the same currency as the bonds they issued. Invoicing exports in U.S. dollars or requesting imports be invoiced in U.S. dollars would not provide the same level of hedging. Requesting imports be invoiced in the currency of the bonds would not be practical, as it would limit the firm's ability to source the best deals on imports from a variety of countries.

Question 12

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

Accepted Answer

An interest rate swap involves two parties exchanging their interest rate payments. In this scenario, two firms from different countries exchange fixed-rate payments for floating-rate payments, allowing each firm to manage their interest rate risk.

Question 13

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:
$$\begin{array} { l c c }
&\underline{ \text { Fixad Fata Gond } }& \underline{\text { Variable Fite Bond }} \ 
\text { Gaod Campany } &10\%&\text { LIBOR } + 1 \%  \
\text { Bad Campany } & 12 \% &\text { LIBOR } + 1.5 \%\
 \

\end{array}$$
Given this information:

Accepted Answer

Good Company prefers variable rate debt and Bad Company prefers fixed rate debt. An interest rate swap is a contract where two parties agree to exchange interest rate cash flows based on a notional amount. In this case, Good Company could agree to pay Bad Company a variable rate (LIBOR + 1%) in exchange for receiving a fixed rate of 10.5%. This would be advantageous to Bad Company because it prefers fixed rate debt and would be able to save on interest payments. At the same time, Good Company would be able to maintain its preference for variable rate debt. Therefore, an interest rate swap would be attractive to both parties, resulting in answer B.

Question 14

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

Accepted Answer

When U.S. firms issue bonds in a foreign currency, they must convert dollars to that currency to make coupon payments. If the dollar weakens, it takes more dollars to buy the same amount of foreign currency, increasing dollar outflows.

Question 15

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

Accepted Answer

If the foreign currency depreciates against the firm's home currency, fewer units of the home currency are needed to make the same coupon payments, as the foreign currency is now cheaper.

Question 16

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

Accepted Answer

The MNC would prefer a currency with a low interest rate to minimize borrowing costs and one that is expected to depreciate to reduce the effective cost of repaying the loan when converted back to the invoice currency.

Question 17

Lantana Co. conducts 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:

Accepted Answer

By obtaining a loan in euros, Lantana Co. can offset some of the exchange rate risk associated with its euro-denominated export revenues.

Question 18

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

Accepted Answer

The answer of A callable swap gives the ____ payer...

Question 19

Simulation is useful in the bond-denomination decision since it can:

Accepted Answer

Simulation allows for the assessment of the probability that a bond denominated in a foreign currency will be less costly than a bond denominated in the home currency. This is useful in making the bond-denomination decision. Option A and B are incorrect as simulation only allows for estimating probable outcomes and not precise computations.

Question 20

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

Accepted Answer

A currency swap involves exchanging one currency for another currency at periodic intervals. The other options mentioned do not accurately describe a currency swap.

Quiz 18: Long-Term Debt Financing

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:

The yields offered on newly issued bonds tend to be:

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

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

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 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:

When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the MNC's exposure to exchange rate risk can be minimized if:

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

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

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

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

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

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

Simulation is useful in the bond-denomination decision since it can:

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