Question 1

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's revenues and expenses are in the same currency, reducing exchange rate risk.

Question 2

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

Accepted Answer

A currency swap involves two firms exchanging one currency for another at periodic intervals. Option A is incorrect as it mentions stock instead of currency, while option B is incorrect as it involves the exchange of a portfolio of foreign currencies, not just two specific currencies. Option C is incorrect as it mentions stock options instead of currencies.

Question 3

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

Accepted Answer

By invoicing its exports in euros, the U.S. firm is effectively creating a natural hedge against the currency risk associated with its euro-denominated bonds. As its export revenues are received in euros, they can be used to service the interest and principal payments on the bonds without the need for foreign exchange transactions. Invoicing imports in the currency denominating the bonds would not necessarily provide a hedge, as the exchange rate risk could still affect the cost of the imported goods. Invoicing exports in U.S. dollars or requesting invoicing of imports in U.S. dollars would not be effective hedges as they would not mitigate the currency risk associated with the euro-denominated bonds.

Question 4

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:  Given this information:

Accepted Answer

Good Company prefers variable to fixed rate debt, while Bad Company prefers fixed to variable rate debt. Therefore, 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%. This allows Good Company to maintain its preference for variable rate debt while also providing Bad Company with the fixed rate debt it desires.

Question 5

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 6

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 and the dollar weakens, the cost in dollars to cover the fixed coupon payments in the foreign currency increases, because more dollars are needed to buy the foreign currency to make the payments.

Question 7

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 8

The yields offered on newly issued bonds tend to be:

Accepted Answer

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

Question 9

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

In an interest rate swap, two parties exchange payments associated with bonds, typically involving the exchange of fixed interest rate payments for floating rate payments. In a currency swap, two parties agree to exchange principal and interest payments in different currencies, which involves periodically exchanging foreign currencies.

Question 10

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

Accepted Answer

Simulation can assess the probability that a bond denominated in a foreign currency will be less costly than a bond denominated in the home currency, which is useful in making the bond-denomination decision. However, simulation cannot precisely compute the cost of financing with bonds denominated in a single foreign currency or in a portfolio of foreign currencies, so options A and B are incorrect.

Question 11

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

Since the firm has a Canadian subsidiary and remits earnings from there, it is already exposed to exchange rate risk with Canadian dollar fluctuations. Borrowing in Canadian dollars would match the currency risk of its existing earnings and potentially reduce exchange rate risk. Borrowing in U.S. dollars (choice A) would expose the firm to exchange rate risk with the USD/CAD exchange rate, and borrowing in Chinese yuan (choice C) or a combination of Canadian dollars and Chinese yuan (choice D) would expose the firm to additional exchange rate risks with the USD/Yuan and CAD/Yuan exchange rates.

Question 12

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

Accepted Answer

An interest rate swap involves exchanging fixed-rate payments for floating-rate payments, which is the exchange mentioned in option A.

Question 13

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

The financing cost to the MNC will be the same as the coupon rate, 15%, because the peso remains stable and the bonds are held until maturity.

Question 14

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

Accepted Answer

This is generally how floating-rate bonds are structured. The coupon rate adjusts periodically based on changes to the chosen benchmark rate, often LIBOR.

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, thus reducing the cost.

Question 16

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 liabilities in the same currency as its cash inflows, reducing exchange rate risk.

Question 17

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 18

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

The financing cost is the yield to maturity, which is the internal rate of return on the bond. To calculate the yield to maturity, we need to find the present value of the bond's cash flows (coupon payments and principal repayment) and set it equal to the bond's price.The bond's cash flows are as follows:Year 1: Coupon payment of 5,000,000 rubles * 17% = 850,000 rublesYear 2: Coupon payment of 5,000,000 rubles * 17% = 850,000 rublesYear 3: Coupon payment of 5,000,000 rubles * 17% = 850,000 rublesYear 3: Principal repayment of 5,000,000 rublesThe bond's price is 5,000,000 rubles.Using a financial calculator, we can find that the yield to maturity is 23.39%.

Question 19

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 loan in a currency with a low interest rate to minimize borrowing costs and one that is expected to depreciate to reduce the repayment amount in terms of its invoice currency.

Question 20

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

To obtain $1,000,000, the subsidiary needs to convert it to PKR at the current exchange rate of $.02 per PKR. Therefore, $1,000,000 / $.02 = 50,000,000 PKR.

Quiz 18: Long-Term Debt Financing

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:

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

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

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: Given this information:

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

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