Exam 18: Long-Term Debt Financing

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:

____ are commonly used to hedge interest rate risk.

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:

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

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.

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:

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

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

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.

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

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

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

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

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

An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for short-term debt than for long-term debt. The yield curve in this country reflects ____.

If an MNC financed with a currency different from its invoice currency, it would prefer that the loan be denominated in a currency that:

Assume that a yield curve's shape is caused by liquidity. 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:

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

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.

U.S.-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.