Exam 15: Long-Term Financing

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

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.

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

Many MNCs simultaneously swap interest payments and currencies.

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.]

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

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

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

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

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

Assume a UK-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 £0.01. Thus, the MNC needs ____ rupees to obtain the $1,000,000 needed.

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.

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

Which of the following is the limitations of the swap:

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

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.

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

If euro-based firms issue bonds in ____, the euro outflows to cover fixed coupon payments increase as the euro ____.

UK-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.

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 £0.014 over the lifetime of the bonds and if the MNC holds the bonds until maturity, the financing cost to the MNC will be: