1) solve for the weighted average cost of capital:
a.8.67%
b.8.00%
c.7.60%
d.7.33%
e.7.14%
2) true or false: floating rate notes behave differently in response to interest rate risk
than straight fixed-rate bonds.
a.true since frns experience only mild price changes between reset dates, over which
time the next period’s coupon payment is fixed (assuming, of course, that the reference
rate corresponds to the market rate applicable to the issuer)
b.false since all bonds experience an inverse price change when the market rate of
interest changes
c.none of the above
3) an american hedge fund is considering a one-year investment in an italian
government bond with a one-year maturity and a euro-denominated rate of return of i =
5%. the bond costs 1,000 today and will return 1,050 at the end of one year without
risk. the current exchange rate is 1.00 = $1.50. u.s. dollar-denominated government
bonds currently have a yield to maturity of 4%. suppose that the european central bank
is considering either tightening or loosening its monetary policy. it is widely believed
that in one year there are only two possibilities:
following revaluation, the exchange rate is expected to remain steady for at least
another year
your banker quotes the euro-zone risk-free rate at i = 5% and the u.s. risk free rate at i$
= 4%. find the value of the option and thereby the correct value of the bond to a u.s.
investor.
4) as of today, the spot exchange rate is 1.00 = $1.60 and the rates of inflation expected
to prevail for the next year in the u.s. is 2% and 3% in the euro zone. what is the
one-year forward rate that should prevail?
a.1.00 = $1.6157
b.1.6157 = $1.00
c.1.00 = $1.5845
d.$1.00 1.03 = 1.60 1.02
5) if a foreign county experiences a hyperinflation,
a.its currency will depreciate against stable currencies
b.its currency may appreciate against stable currencies
c.its currency may be unaffectedit’s difficult to say
d.none of the above
6) these days the benefits of “tax haven” subsidiaries have been reduced by
a.the present corporate income tax rate in the united states is not especially high in
comparison to most non-tax haven countries
b.the rules governing controlled foreign corporations have effectively eliminated the
ability to defer passive income in a tax haven subsidiary
c.all of the above
d.none of the above
7) intervention in the foreign exchange market is the process of
a.a central bank requiring the commercial banks of that country to trade at a set price
level
b.commercial banks in different countries coordinating efforts in order to stabilize one
or more currencies
c.a central bank buying or selling its currency in order to influence its value
d.the government of a country prohibiting transactions in one or more currencies
8) suppose you observe the following exchange rates: 1 = $.85; £1 = $1.60; and 2.00 =
£1.00. starting with $1,000,000, how can you make money?
a.exchange $1m for £625,000 at £1 = $1.60. buy 1,250,000 at 2 = £1.00; trade for
$1,062,500 at 1 = $.85
b.start with dollars, exchange for euros at 1 = $.85; exchange for pounds at 2.00 =
£1.00; exchange for dollars at £1 = $1.60
c.start with euros; exchange for pounds; exchange for dollars; exchange for euros
d.no arbitrage profit is possible
9) a mnc can
a.be a factor that increases the opportunities of the citizens of less developed countries
b.be a factor that increases the opportunity set of domestic investors
c.increase economic efficiency
d.all of the above
10) an offshore banking center is
a.a country whose banking system is organized to permit external accounts beyond the
normal economic activity of the county
b.is external to any government, frequently located on old oil drilling platforms located
in international waters
c.a country like north korea
d.none of the above
11) according to raymond vernon (1966),
a.u.s. firms undertake fdi at a particular stage in the life cycle of the products that they
initially introduced
b.the majority of new products, such as computers, televisions, and mass-produced cars,
were developed by u.s. firms and first marketed in the united states
c.in the early stage of the product life cycle, the demand for the new product is
relatively insensitive to the price and thus the pioneering firm can charge a relatively
high price
d.all of the above
12) a bank may establish a multinational operation for the reason of low marginal costs.
the underlying rationale being that
a.banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational’s foreign subsidiaries
b.multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition
c.managerial and marketing knowledge developed at home can be used abroad with low
marginal costs
d.the foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market
13) “dragon” bonds are
a.dollar-denominated foreign bonds originally sold to u.s. investors
b.dollar-denominated bonds originally sold in asia with non-japanese issuers
c.pound sterling-denominated foreign bonds originally sold in the u.k
d.none of the above
14) find the weighted average cost of capital for a firm that has a debt-to-equity ratio of
1, a tax rate of 34%, a levered cost of equity of 12% and a pre-tax cost of debt of 10%.
a.9.6%
b.7.968%
c.8.76%
d.none of the above
15) unlike a bond issue, in which the entire issue is brought to market at once, _______
is partially sold on a continuous basis through an issuance facility that allows the
borrower to obtain funds only as needed on a flexible basis.
a.a euro-medium term note issue
b.bearer bond
c.a euro-long term note issue
d.a euro-short term note issue
16) translation exposure refers to
a.accounting exposure
b.the effect that an unanticipated change in exchange rates will have on the consolidated
financial reports of an mnc
c.the change in the value of a foreign subsidiaries assets and liabilities denominated in a
foreign currency, as a result of exchange rate change fluctuations, when viewed from
the perspective of the parent firm
d.all of the above
17) over the last few years, turnover ratios in many emerging markets remained low and
market concentration ratios remained high, indicating
a.that investment opportunities in these markets have been improving
b.that investment opportunities in these markets have not been improving
c.that investment opportunities in these markets are about to improve
d.none of the above
18) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward bid exchange
rate in $ per that that satisfies irp from the perspective of a customer.
19) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
following revaluation, the exchange rate is expected to remain steady for at least
another year
find the expost irr in euro for the french firm if they undertake the project today and
then the exchange rate falls to s1(|£) = 1.80 per £.
20) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
explain how this opportunity affects which swap firm a will be willing to participate in.
21) the time from acceptance to maturity on a $500,000 banker’s acceptance is 270
days.
the importing bank’s acceptance commission is 0.75 percent and that the market rate for
270-day b/as is 4 percent.
determine the amount the exporter will receive if he discounts the b/a with the
importer’s bank.
22) the growth of the eurodollar market, which is a transnational, unregulated fund
market
a.was encouraged by u.s. legislation designed to stem the outflow of dollars from the
u.s
b.was discouraged by u.s. legislation designed to stem the outflow of dollars from the
u.s
23) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
devise a direct swap for a and b that has no swap bank. show their external borrowing.
answer the problem in the template provided.
24) consider the situation of firm a and firm b. the current exchange rate is $1.50/. firm
a is a u.s. mnc and wants to borrow 40 million for 2 years. firm b is a french mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown;
both firms have aaa credit ratings.
what would be the interest rate?