Multiple Choice
Identify the
choice that best completes the statement or answers the question.
|
|
|
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. |
|
|
|
2.
|
Firm "X" conducts all business transactions in pounds. If it issues a
currency cocktail bond, it can:
a. | reduce exchange rate risk relative to issuing a bond denominated in
pounds. | b. | reduce exchange rate risk relative to issuing a bond denominated in a single foreign
currency. | c. | A and B | d. | none of the
above |
|
|
|
3.
|
When ignoring exchange rate risk, bond yields:
a. | are the same for all currencies. | b. | are consistently higher for all non-UK bonds
than UK bonds. | c. | are consistently lower for all non-UK bonds than UK bonds. | d. | none of the
above |
|
|
|
4.
|
If the currency denominating a foreign bond depreciates against the firm's
home currency, the funds needed to make coupon payments will increase.
|
|
|
5.
|
Assume a UK-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 £0.01. Thus,
the MNC needs ___________ rupees to obtain the $1,000,000 needed.
a. | 100,000,000 | c. | 1,000,000 | b. | 10,000 | d. | none of the
above |
|
|
|
6.
|
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 | c. | interest rate; interest
rate | b. | currency; interest rate | d. | currency; currency |
|
|
|
7.
|
Bad Company prefers fixed to variable rate debt. Assume the following
information for Good and Bad Companies: | | 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% 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 the above |
|
|
|
8.
|
Some firms may be uncomfortable issuing bonds denominated in foreign currencies
because exchange rates are __________ difficult to predict over ________ time horizons.
a. | less; long | c. | more; long | b. | more; short | d. | none of the
above |
|
|
|
9.
|
Countries where bond yields are ________ tend to have a _______ risk-free
interest rate.
a. | low; high | c. | high; high | b. | high; low | d. | none of the
above |
|
|
|
10.
|
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 | c. | is the same as | b. | exceeds | d. | none of the
above |
|
|
|
11.
|
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 | c. | short; exchange rate | b. | long; interest rate | d. | none of the
above |
|
|
|
12.
|
Since yield curves are identical across countries, MNCs rarely consider them
when deciding on the maturity of bonds denominated in a foreign currency.
|