Question 1

Simulation is useful in the bond-denomination decision since it can:

Accepted Answer

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 
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

Question 2

Many MNCs simultaneously swap interest payments and currencies.

Accepted Answer

A) True 
 B)False

Question 3

Fixed-rate loans have interest rates that are fixed for each year but adjust at the end of each year in response to prevailing interest rates.

Accepted Answer

A) True 
 B)False

Question 4

A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.

Accepted Answer

A) True 
 B)False

Question 5

Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.

Accepted Answer

A) True 
 B)False

Question 6

When an MNC needs to finance a portion of a foreign project within the foreign country, the best method to account for a foreign project's risk is to:

Accepted Answer

A)  apply a required return that is based on the CAPM. 
B)  apply a required return based on unsystematic risk. 
C)  derive the net present value of the equity investment. 
D)  apply the required return equal to the risk-free rate in the foreign country. 
A)  apply a required return that is based on the CAPM. 
B)  apply a required return based on unsystematic risk. 
C)  derive the net present value of the equity investment. 
D)  apply the required return equal to the risk-free rate in the foreign country.

Question 7

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.]

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)  floating-rate; rise 
B)  floating-rate; fall 
C)  fixed-rate; rise 
D)  fixed-rate; fall 
E)  none of the above 
A)  floating-rate; rise 
B)  floating-rate; fall 
C)  fixed-rate; rise 
D)  fixed-rate; fall 
E)  none of the above

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:   Given this information:

Accepted Answer

A)  an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company. 
B)  an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%. 
C)  an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%. 
D)  none of the above 
A)  an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company. 
B)  an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%. 
C)  an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%. 
D)  none of the above

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

A ____ gives its owner the right to enter into a swap.

Accepted Answer

A)  basis swap 
B)  swaption 
C)  callable swap 
D)  putable swap 
A)  basis swap 
B)  swaption 
C)  callable swap 
D)  putable swap

Question 13

The yields offered on newly issued bonds tend to be:

Accepted Answer

A)  lower in less developed countries where labor costs are low. 
B)  relatively high in countries such as Japan and the U.S. because the credit risk premium is much higher there than in other countries. 
C)  the same across countries at a give point in time. 
D)  none of the above 
A)  lower in less developed countries where labor costs are low. 
B)  relatively high in countries such as Japan and the U.S. because the credit risk premium is much higher there than in other countries. 
C)  the same across countries at a give point in time. 
D)  none of the above

Question 14

In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.

Accepted Answer

A)  callable 
B)  putable 
C)  amortizing 
D)  zero-coupon 
A)  callable 
B)  putable 
C)  amortizing 
D)  zero-coupon

Simulation is useful in the bond-denomination decision since it can:

Many MNCs simultaneously swap interest payments and currencies.

Fixed-rate loans have interest rates that are fixed for each year but adjust at the end of each year in response to prevailing interest rates.

A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.

Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.

When an MNC needs to finance a portion of a foreign project within the foreign country, the best method to account for a foreign project's risk is to:

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.]

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

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.

Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies: Given this information:

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.

A ____ gives its owner the right to enter into a swap.

The yields offered on newly issued bonds tend to be:

In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 18: Long-Term Debt Financing

Simulation is useful in the bond-denomination decision since it can:

Many MNCs simultaneously swap interest payments and currencies.

Fixed-rate loans have interest rates that are fixed for each year but adjust at the end of each year in response to prevailing interest rates.

A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.

Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.

When an MNC needs to finance a portion of a foreign project within the foreign country, the best method to account for a foreign project's risk is to:

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.]

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

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.

Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies: Given this information:

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.

A ____ gives its owner the right to enter into a swap.

The yields offered on newly issued bonds tend to be:

In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Financing International Trade

Short-Term Financing

International Cash Management

Filters

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