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Chapter 18
Long-Term Debt Financing
Lecture Outline
Financing to Match the Inflow Currency
Using Currency Swaps to Execute the Matching Strategy
Using Parallel Loans to Execute the Matching Strategy
Debt Denomination Decision by Subsidiaries
Debt Decision in Host Countries with High Interest Rates
Debt Denomination to Finance a Foreign Project
Debt Maturity Decision
Assessment of Yield Curve
Financing Costs of Loans with Different Maturities
Fixed Versus Floating Debt Decision
Financing Costs of Fixed Versus Floating-Rate Loans
Hedging Interest Payments with Interest Rate Swaps
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Long-Term Debt Financing 2
Chapter Theme
Should the MNC choose bonds as a medium to attract long-term funds, a currency for denomination must
be chosen. This is a critical decision for the MNC. While there is no clear-cut solution, this chapter
illustrates how such a problem can be analyzed. A suggested method of presenting this analysis is to run
through an example under assumed exchange rates. Then stress that future exchange rates are not known
with certainty. Therefore, the firm should consider the possible costs of financing under a variety of
exchange rate scenarios.
Topics to Stimulate Class Discussion
1. Why would U.S. firms consider issuing bonds denominated in a foreign currency?
2. What are the desirable characteristics related to a currency’s interest rate (high or low) and value
(strong or weak) that would make the currency attractive from a borrower’s perspective?
POINT/COUNTER-POINT:
Will Currency Swaps Result in Low Financing Costs?
POINT: Yes. Currency swaps have created greater participation by firms that need to exchange their
currencies in the future. Thus, firms that finance in a low interest rate currency can more easily establish
an agreement to obtain the currency that has the low interest rate.
COUNTER-POINT: No. Currency swaps will establish an exchange rate that is based on market forces. If
a forward rate exists for a future period, the swap rate should be somewhat similar to the forward rate. If it
was not as attractive as the forward rate, the participants would use the forward market instead. If a
forward market does not exist for the currency, the swap rate should still reflect market forces. The
exchange rate at which a low-interest currency could be purchased will be higher than the prevailing spot
rate, since otherwise MNCs would borrow the low-interest currency and simultaneously purchase the
currency forward so that they could hedge their future interest payments.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: The swap rates will be in line with forward rates, so that MNCs will not benefit from
borrowing low interest rate currencies and simultaneously hedging.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
