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Chapter 18
Long-Term Financing
1. Ideally, a firm desires to denominate bonds 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.
ANSWER: B
2. 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 the currency denominating the
bonds.
ANSWER: C
3. Firm X conducts all business transactions in U.S. dollars. If it issues a currency cocktail bond, it
can:
A) reduce exchange rate risk relative to issuing a bond denominated in U.S. dollars.
B) reduce exchange rate risk relative to issuing a bond denominated in a single foreign currency.
C) both of these.
D) none of these.
ANSWER: B
4. Simulation is useful in the bond-denomination decision since it can:
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) precisely compute the cost of financing with bonds denominated in either a single foreign
currency or in a portfolio of foreign currencies.
ANSWER: C

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5. 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
ANSWER: A
6. 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
ANSWER: A
7. The yields offered on newly issued bonds denominated in dollars have:
A) consistently increased over the last 10 years.
B) consistently decreased over the last 10 years.
C) remained stable.
D) none of these.
ANSWER: D
8. When ignoring exchange rate risk, bond yields:
A) are the same for all currencies.
B) are consistently higher for all non-U.S. bonds than U.S. bonds.
C) are consistently lower for all non-U.S. bonds than U.S. bonds.
D) none of these.
ANSWER: D
9. A U.S. firm has received 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 U.S. 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.
ANSWER: A

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86

10. A U.S. firm has a Canadian subsidiary that remits some of its earnings to the parent on an annual
basis. The firm has no other foreign business. The firm could best reduce its exposure to exchange
rate risk by issuing bonds denominated in:
A) U.S. dollars.
B) Canadian dollars.
C) multiple currencies.
D) a unit of account such as the SDR.
ANSWER: B
11. An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
A) convert to floating-rate debt.
B) hedge exchange rate risk.
C) lock in the interest payments on debt.
D) remove the default risk of its debt.
ANSWER: A
12. A currency swap between two firms of different countries enables the exchange of _______ for
_______ at periodic intervals.
A) stock; one currency
B) stock; a portfolio of foreign currencies
C) one currency; stock options
D) one currency; another currency
ANSWER: D
13.

Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in

Pakistani rupees (PKR). The current exchange rate of the rupee is $.02. Thus, the MNC needs
_______ rupees to obtain the $1,000,000 needed.
A) 50,000,000
B) 20,000
C) 1,000,000
D) none of these
ANSWER: A
SOLUTION: $1,000,000/$.02 = PKR50,000,000

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14.

An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The
bonds have a coupon rate of 15%. 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%.
B) 12.5%.
C) 15.0%.
D) none of these.
ANSWER: C
SOLUTION: Since the bonds are issued at par, and since the exchange rate remains stable over the
life of the bonds and the bonds are held until maturity, the financing cost will be exactly the coupon
rate of the bond.

15.

New Hampshire Corp. has decided to issue three-year bonds denominated in 5,000,000
Slovakian koruna (SKK) at par. The bonds have a coupon rate of 17%. If the koruna 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%.
B) 23.18%.
C) 22.36%.
D) 23.39%.
ANSWER: D
SOLUTION:
Payments in Slovakian koruna
Forecasted exchange rate of koruna
Payments in dollars

16.

Year 1
850,000
$.032
$27,200

Year 2
850,000
$.034
$28,900

Year 3
5,850,000
$.035
$204,750

Annual Cost of
Financing
23.39%

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
ANSWER: A

Chapter 18: Long-Term Financing

17.

88

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

Fixed-Rate Bond
10%
12%

Variable-Rate Bond
LIBOR + 1%
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% 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 these.
ANSWER: B
18.

_______ are beneficial because they may reduce transaction costs. However, MNCs may not be
able to obtain all the funds that they need.
A) Private placements
B) Domestic equity offerings
C) Global equity offerings
D) Global debt offerings
ANSWER: A

19.
A)
B)
C)
D)

Most MNCs obtain equity funding:

in foreign countries.
in their home country.
through global offerings.
through private placements.

ANSWER: B
20.

Some firms may be uncomfortable issuing bonds denominated in foreign currencies because
exchange rates are _______ difficult to predict over _______ time horizons.
A) less; long
B) more; short
C) more; long
D) none of these
ANSWER: C

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21.
A)
B)
C)
D)

Countries where bond yields are _______ tend to have a _______ risk-free interest rate.
low; high
high; low
high; high
none of these

ANSWER: C
22.

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
ANSWER: C

23.

An upward-sloping yield curve for a foreign country means that annualized yields there are
_______ for short-term debt than for long-term debt. The yield curve in this country reflects
_______.
A) higher; several periods
B) lower; several periods
C) higher; a specific point in time
D) lower; a specific point in time
ANSWER: D

24.

When financing international operations, MNCs typically will not use a maturity that _______
the expected life of the business in that country.
A) is less than
B) exceeds
C) is the same as
D) none of these
ANSWER: B

25.

When an MNC finances in a currency that matches its cash inflows using a relatively _______
maturity, the MNC is exposed to _______ risk.
A) short; interest rate
B) long; interest rate
C) short; exchange rate
D) none of these
ANSWER: B

Chapter 18: Long-Term Financing

26.

90

As a(n) _______ to an interest rate swap, a financial institution simply arranges a swap
between two parties.
A) ultraparty
B) broker
C) counterparty
D) none of these
ANSWER: B

27.

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
D) none of these
ANSWER: B

28.
A)
B)
C)
D)

In a(n) _______ swap, the fixed rate payer has the right to terminate the swap.
callable
putable
amortizing
zero-coupon

ANSWER: A
29.
A)
B)
C)
D)

In a(n) _______ swap, the notional value is increased over time.

amortizing
basis
zero-coupon
accretion

ANSWER: D
30.
A)
B)
C)
D)

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

basis swap
swaption
callable swap
putable swap

ANSWER: B
31.

Eurobonds are often issued with a floating coupon rate that is tied to LIBOR.
A) true.
B) false.
ANSWER: A

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32.

If the currency denominating a foreign bond depreciates against the firms home currency, the
funds needed to make coupon payments will increase.
A) true.
B) false.
ANSWER: B

33.

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) true.
B) false.
ANSWER: B

34.

Because bonds denominated in foreign currencies rarely have lower yields, U.S. corporations
rarely consider issuing bonds denominated in those currencies.
A) true.
B) false.
ANSWER: B

35.

U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offset
exposure to exchange rate risk by issuing bonds denominated in the subsidiarys local currency.
A) true.
B) false.
ANSWER: A

36.

Some MNCs use a countrys 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.
ANSWER: A

37.

The actual financing cost of a U.S. corporation issuing a bond denominated in euros is affected
by the euros value relative to the U.S. dollar during the financing period.
A) true.
B) false.
ANSWER: A

38.

A floating coupon rate can be an advantage to the bond issuer during periods of increasing
interest rates.
A) true.
B) false.
ANSWER: B

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39.

92

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.
ANSWER: A

40.

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.
ANSWER: B

41.

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.
ANSWER: B

42.

Two limitations of interest rate swaps are that there is a cost of time and resources associated
with searching for a suitable partner and that there is a risk to each swap participant that the
counterparticipant could default on his payments.
A) true.
B) false.
ANSWER: A

43.

Many MNCs simultaneously swap interest payments and currencies.

A) true.
B) false.
ANSWER: A

44.

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.
ANSWER: A

45.

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.
ANSWER: B