Exam 18: Long-Term Debt Financing

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.

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.)

​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:

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

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.

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.

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

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

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

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.

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.

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:

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.

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

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

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?

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:

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