Deck 15: Long-Term Financing

Question 1

Simulation is useful in the bond-denomination 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 denominated in the home currency.
D) A and B

Answer 1

C

Question 2

A euro-based 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 euro area. 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 euro-denominated bonds.
D) issuing euro-denominated bonds.

Answer 2

A

Question 3

When an MNC finances in 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

Answer 3

B

Question 4

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

Question 5

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 6

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.

Question 7

Many MNCs simultaneously swap interest payments and currencies.

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

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 10

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 11

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 12

When deciding whether to take out a short- or long-term loan, there is always a clear answer to this question.

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 £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:

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

Question 14

Firm X conducts all business transactions in pounds. If it issues a currency cocktail bond, it can:

A) reduce exchange rate risk relative to issuing a bond denominated in pounds.
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 15

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.

Question 16

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

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

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

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

Question 19

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.

A) 100,000,000
B) 10,000
C) 1,000,000
D) None of the above

Question 20

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

Question 21

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.

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

Question 22

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 23

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 24

Ideally, a firm desires to denominate bonds 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 25

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

Question 26

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

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

Question 27

When ignoring exchange rate risk, bond yields:

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

Question 28

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 29

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 30

____ 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 31

Which of the following is the limitations of the swap:

A) there is a cost of time and resources associated with searching for a suitable swap candidate and negotiating the swap terms.
B) each swap participant faces the risk that the counterparty could default on payments.
C) A and B
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

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 34

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

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

Question 35

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 36

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 37

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 38

As a(n) ____ 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 39

Most MNCs obtain equity funding:

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

Question 40

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 41

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.

Question 42

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 43

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.