Exam 18: Long-Term Debt Financing

Assume a U.S.-based subsidiary wants to raise $1 million 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 million needed.

A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparty could default on its payments.

Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars.

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

____ are commonly used to hedge interest rate risk.

When estimating the cost of debt financing for a subsidiary, an MNC can use sensitivity analysis and simulation to account for the uncertainty surrounding forecasted exchange rates.

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.

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.

When an MNC finances with a floating-rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk.

The ____ for a given country represents the annualized yield offered on debt for various maturities.

Even if a foreign interest rate is higher than an MNC's domestic interest rate, the financing costs of issuing a bond denominated in the foreign currency will always be lower than the financing cost of a domestic bond as long as the currency depreciates over the lifetime of the bond.

A floating coupon rate is 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 ____.

Generally, the financing costs associated with a foreign currency-denominated bond will be ____ volatile than the financing costs of a domestic bond because of ____.

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.

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.

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

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