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Indicate whether the statement is true or false.
1. 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.
a.
True
b.
False
2. Since yield curves are identical across countries, MNCs rarely consider them when deciding on the maturity of bonds
denominated in a foreign currency.
a.
True
b.
False
3. 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.
a.
True
b.
False
4. 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.
True
b.
False
5. 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.
True
b.
False
6. A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in
the future.
a.
True
b.
False
7. Floating rate bonds are often issued with a floating coupon rate that is tied to LIBOR.
a.
True
b.
False
8. 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.
a.
True
b.
False
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.
a.
True
b.
False
10. A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparty could default on
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its payments.
a.
True
b.
False
11. 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.)
a.
True
b.
False
12. 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.
a.
True
b.
False
13. If an MNC issues bonds denominated in a foreign currency and that currency depreciates against the MNC’s home
currency, the funds needed to make coupon payments will increase.
a.
True
b.
False
14. The global trade association that is credited with helping to standardize the swaps market is called the International
Monetary Fund.
a.
True
b.
False
15. Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars.
a.
True
b.
False
16. 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.
a.
True
b.
False
17. A floating coupon rate is an advantage to the bond issuer during periods of increasing interest rates.
a.
True
b.
False
18. 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.
True
b.
False
19. 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.
True
b.
False
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Indicate the answer choice that best completes the statement or answers the question.
20. 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.
a.
interest rate
b.
credit
c.
exchange rate
d.
None of these are correct.
21. If an MNC finances with a currency different from its invoice currency, it would prefer that the loan be denominated
in a currency that:
a.
exhibits a low interest rate and is expected to appreciate.
b.
exhibits a low interest rate and is expected to depreciate.
c.
exhibits a high interest rate and is expected to depreciate.
d.
exhibits a high interest rate and is expected to appreciate.
22. Generally, the financing costs associated with a foreign currency–denominated bond will be ____ volatile than the
financing costs of a domestic bond because of ____.
a.
more; exchange rate movements
b.
less; exchange rate movements
c.
less; global economic conditions
d.
None of these are correct.
23. A ____ gives its owner the right to enter into a swap.
a.
basis swap
b.
swaption
c.
callable swap
d.
putable swap
24. When a financial institution acts as a(n) ____ to an interest rate swap, it simply arranges a swap between two parties.
a.
ultraparty
b.
broker
c.
counterparty
d.
None of these are correct.
25. ____ swaps are often used by companies to hedge against ____ rate risk.
a.
Currency; interest
b.
Interest rate; interest
c.
Interest rate; exchange
d.
Currency; exchange
e.
Interest rate; interest AND currency; exchange
26. A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.
a.
stock; one currency
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b.
stock; a portfolio of foreign currencies
c.
one currency; stock options
d.
one currency; another currency
27. 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?
a.
17 percent
b.
23.18 percent
c.
22.36 percent
d.
23.39 percent
28. 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.
a.
forward contracts
b.
currency swaps
c.
parallel loans
d.
None of these are correct.
29. If the currency of a foreign currency–denominated bond ____, the funds needed to make coupon payments will ____.
a.
appreciates; increase
b.
depreciates; decrease
c.
appreciates; decrease
d.
depreciates; increase
e.
appreciates; increase AND depreciates; decrease
30. 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:
a.
flat.
b.
inverted.
c.
upward sloping.
d.
downward sloping.
31. Simulation is useful in the debt denomination decision since it can:
a.
precisely compute the cost of financing with debt denominated in a single foreign currency.
b.
precisely compute the cost of financing with debt denominated in a portfolio of foreign currencies.
c.
assess the probability that debt denominated in a foreign currency will be less costly than debt denominated in
the home currency.
d.
precisely compute the cost of financing with debt denominated in a single foreign currency AND precisely
compute the cost of financing with debt denominated in a portfolio of foreign currencies.
32. In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____.
a.
fixed; decline
b.
floating; decline
c.
floating; increase
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d.
None of these are correct.
33. The ____ for a given country represents the annualized yield offered on debt for various maturities.
a.
LIBOR
b.
yield curve
c.
parallel loan
d.
interest rate swap
34. 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:
a.
issuing Swiss franc–denominated bonds.
b.
purchasing Swiss franc–denominated bonds.
c.
purchasing U.S. dollar–denominated bonds.
d.
issuing U.S. dollar–denominated bonds.
35. A(n) ____ swap can be established today, but the swap payments start at a specific future point in time.
a.
accreting
b.
amortizing
c.
forward
d.
zero-coupon
e.
putable
36. 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.
U.S. dollars.
b.
euros.
c.
Canadian dollars.
d.
None of these are correct.
37. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume that
Good and Bad Companies could issue bonds as follows:
Fixed Rate Bond
Variable Rate Bond
Good Company
10%
LIBOR + 1%
Bad Company
12%
LIBOR + 1.5%
Given this information:
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 percent in exchange for fixed rate payments of 10.5 percent.
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 percent in exchange for fixed rate payments of 10.5 percent.
d.
None of these are correct.
38. A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise this right if interest
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rates ____ substantially.
a.
floating rate; rise
b.
floating rate; fall
c.
fixed rate; rise
d.
fixed rate; fall
e.
None of these are correct.
39. If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____.
a.
a foreign currency; weakens
b.
dollars; strengthens
c.
a foreign currency; strengthens
d.
dollars; weakens
40. In a(n) ____ swap, the notional value is reduced over time.
a.
accreting
b.
amortizing
c.
forward
d.
zero-coupon
e.
putable
41. An interest rate swap between two firms of different countries enables the exchange of ____ for ____.
a.
fixed rate payments; floating rate payments
b.
stock; interest deductions on taxes
c.
interest payments on loans; ownership of debt of less developed countries
d.
interest payments on loans; stock
42. In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____ swap, two parties
agree to periodically exchange foreign currencies.
a.
interest rate; currency
b.
currency; interest rate
c.
interest rate; interest rate
d.
currency; currency
43. A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It
also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business and needs a small
loan. The firm could best reduce its exposure to exchange rate risk by borrowing:
a.
U.S. dollars.
b.
Canadian dollars.
c.
Chinese yuan.
d.
a combination of Canadian dollars and Chinese yuan.
44. The yields offered on newly issued bonds tend to be:
a.
lower in less developed countries where labor costs are low.
b.
relatively high in countries such as Japan and the United States because the credit risk premium is much higher
there than in other countries.
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c.
the same across countries at a given point in time.
d.
None of these are correct.
45. 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:
a.
10.0 percent.
b.
12.5 percent.
c.
15.0 percent.
d.
None of these are correct.
46. A(n) _____ yield curve for a country means that annualized yields are ____ for short-term debt than for long-term
debt.
a.
upward-sloping; higher
b.
flat; lower
c.
downward-sloping; lower
d.
upward-sloping; lower
47. Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on
bonds issued in those countries are ____.
a.
low; high
b.
high; low
c.
high; high
d.
None of these are correct.
48. ____ are commonly used to hedge interest rate risk.
a.
Currency swaps
b.
Parallel loans
c.
Interest rate swaps
d.
Forward contracts
e.
None of these are correct.
49. A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:
a.
invoicing its exports in U.S. dollars.
b.
requesting that any imports ordered by the firm be invoiced in U.S. dollars.
c.
invoicing its exports in euros.
d.
requesting that any imports ordered by the firm be invoiced in euros.
50. In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
a.
callable
b.
putable
c.
amortizing
d.
zero-coupon
51. Assume a U.S.-based subsidiary wants to raise $1 million by issuing a bond denominated in Pakistani rupees (PKR).
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The current exchange rate of the rupee is $.02. Thus, the MNC needs ____ rupees to obtain the $1 million needed.
a.
50,000,000
b.
20,000
c.
1,000,000
d.
None of these are correct.
52. In a(n) ____ swap, the notional value is increased over time.
a.
amortizing
b.
basis
c.
zero-coupon
d.
accreting
53. An interest rate swap is commonly used by an issuer of fixed rate bonds to:
a.
convert to floating rate payments.
b.
hedge exchange rate risk.
c.
lock in the interest payments on its debt.
d.
eliminate the credit risk of its debt.
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52. d
53. a