International-Financial-Management---Bekaert-2e---Solutions---Ch11.doc
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International-Financial-Management---Bekaert-2e---Solutions---Ch11.doc
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11
Chapter11:
InternationalDebtFinancing
Chapter 11
InternationalDebtFinancing
QUESTIONS
1.Whatarethethreemainsourcesoffinancingforanyfirm?
Answer:
Corporationsrelyonthreeprimarytypesoffinancingfortheircapitalexpenditures:
internallygeneratedfunds,debtfinancing,andequityfinancing.
2.WhatisthedifferencebetweenacentralizedanddecentralizeddebtdenominationforaMNC?
Answer:
Underadecentralizeddebt-denominationmodel,MNCsissuedebtindifferentcurrenciestohedgethecashflowstheyearninthesecurrenciesfromtheirforeignsubsidiaries.Underacentralizedmodel,debtisissuedinthecurrencyofthecountryinwhichtheMNChasitsheadquarters.
3.WillaMNCissuingdebtinlow–interestratecurrenciesnecessarilyloweritscostoffunds?
Why?
Answer:
No.Theultimatecostofthedebtwillalsodependoncurrencymovements.Ifuncoveredinterestrateparityholds,thecostofthelowinterestratedebt,expressedinthehomecurrency,isexpectedtobeidenticaltothecostofhighinterestratedebt.Afterthefact,thedebtwillbeeitherlessexpensivethancorrespondingdebtdenominatedinthedomesticcurrency,iftheforeigncurrencyappreciateslessthanpredictedbyUIRP;oritwillbemoreexpensiveiftheforeigncurrencyappreciatesmorethanpredictedbyUIRP.
4.ShouldaMNCborrowprimarilyshorttermwhenshort-terminterestratesarelowerthanlong-terminterestrates?
Orshoulditkeepthematuritythesamebutuseafloating-rateloanratherthanafixed-rateloan?
Explain.
Answer:
First,ifshort-terminterestratesarelowerthanlong-terminterestrates,thismaybeanindicationofimpendingincreasesininterestrates.Infact,iftheexpectationshypothesisofthetermstructureofinterestratesholds,thelongrateissimplyanappropriatelyweightedaverageofshorttermrates.Thisimpliesthat“timing”theloanbyhavingafloatinginterestratethatallowsforlowinterestpaymentswhenshortratesarelowandhighinterestpaymentswhenshortratesarehighdoesnotaddvalue.Second,thedifferencebetweensimplyborrowingshort-termandusingafloatingratenoteisthatthelatterapproachalsolocksintheMNC’screditspread.Ifthefirmthinksitscreditratingwillimproveovertime,itmaynotwanttoissueafloatingratenote,preferringinsteadtoborrowshort-termandborrowagainatabettercreditspreadaftertheinformationisincorporatedbythemarket.
5.Whatisfinancialdisintermediation?
Answer:
Thisconceptreferstothephenomenoninwhichfirmsissuesecuritiesdirectlytoinvestorsinthecapitalmarkets,ratherthanborrowingfromfinancialinstitutionsthatinturnraisefundsfromthecapitalmarkets.
6.Whatarethetwomainsegmentsoftheinternationalbondmarket,andwhattypesofregulationsapplytothem?
Answer:
Onesegmentoftheinternationalbondmarketistheforeignbondmarket,whereaforeignissuerissuesbondsinaparticulardomesticbondmarket,subjecttolocalregulations.TheothersegmentistheEurobondmarket,wherebondsareissuedsimultaneouslyinvariousmarkets,outsidethespecificjurisdictionofanycountry.Hence,thesebondsarenotsubjecttotheregulationsofanyparticularcountry.
7.WhatisthedifferencebetweenaforeignbondandaEurobond?
Answer:
SeetheanswertoQuestion6.
8.WhymightU.S.investorscontinuetopurchaseEurobonds,despitethefactthattheU.S.corporatebondmarketiswelldeveloped?
Answer:
TheEurobondmarketgivesthemaccesstobondsoffirmsthatarenotavailableintheU.S.markettherebyprovidingvaluablediversificationofdefaultrisk.RecallthattheEurobondmarketisahighlyliquid,unregulated,convenientmarkettoissuebonds,whichhasleadtoawidearrayofavailablebondsfromwhichinvestorscanchoose.Also,Eurobondsarenotregistered(ownershipisanonymous),anditmaythereforeallowcertaintaxavoidancebenefitstonon-scrupulousinvestors.
9.Whatisaglobalbond,andwhatroledoestheglobalbondmarketplayintheblurringofthedistinctionsintheinternationalbondmarket?
Answer:
GlobalbondsareissuedsimultaneouslyinadomesticmarketandintheEurobondmarket,andtheythereforestraddlethetwosegmentsoftheinternationalbondmarket,makingdistinctionsbetweenthemmoredifficulttodraw.
10.Whatarethedifferencesbetweenastraightbond,afloating-ratenote,andaconvertiblebond?
Answer:
Astraightbondhasnospecialfeatures.Ithasafixedcouponpaymentandafinalprincipalpaymentatmaturity.Afloating-ratenotecarriesafloatinginterestratethattypicallyvarieswithshort-termLIBOR.Convertiblebondsallowtheholdertoconvertthebondsintoacertainamountofstockandthereforehaveanoptionfeature.
11.Whatisadual-currencybond?
Answer:
Dual-currenc
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