International Financial Management, 2e (Bekaert / Hodrick)

Chapter 11 International Debt Financing

11.1 Multiple Choice Easy
1) The sources of funds for a multinational corporation and its subsidiaries can be subdivided into two
categories, ________ and ________.
) internally!generated, e"ternally generated
#) retained earnings, internally!generated
C) capital mar$ets!generated, e"ternally generated
%) retained earnings, e"ternally!generated
nswer&
Comment& The 'lobal (ources of )unds for *nternational )irms, p.+,-
.) The hedging strategy that offsets foreign assets with foreign liabilities is $nown as ________ hedge.
) an income!statement
#) balance!sheet
C) decentrali/ed debt
%) decentrali/ed e0uity
nswer& #
Comment& Centrali/ed 1ersus %ecentrali/ed %ebt %enomination, p. +-1
+) balance!sheet hedging strategy would offset ________ with ________.
) depreciating currencies, appreciating currencies
#) foreign revenues, foreign e"penses
C) foreign assets, foreign liabilities
%) floating e"change rates systems, fi"ed e"change rate systems
nswer& C
Comment& Centrali/ed 1ersus %ecentrali/ed %ebt %enomination, p. +-1
2) 3hich one of the following is 45T an e"ternal source of corporate funding6
) ban$ loan
#) retained earnings
C) debt security
%) e0uity
nswer& #
Comment& The 'lobal (ources of )unds for *nternational )irms, p.+,7
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;) 3hich one of the following statements is true for the centrali/ed debt denomination model6
) The debts for both the parent company and its foreign subsidiaries are denominated in the home
currency of the parent company.
#) The debt service payments are denominated in the currency in which the subsidiary<s revenues are
received.
C) The debts for both the parent company and its foreign subsidiaries are denominated in the currency of
the largest subsidiary.
%) The debt service payments are denominated in the currency in which the subsidiary<s revenues are
received which does not balance foreign assets against foreign liabilities.
nswer&
Comment& Centrali/ed 1ersus %ecentrali/ed %ebt %enomination, p. +-1
=) 3hich type of bond is issued in a domestic mar$et by a borrower overseas, denominated in the
domestic currency, mar$eted to domestic residents, and regulated by the domestic authorities6
) international bond
#) domestic bond
C) Eurobond
%) foreign bond
nswer& %
Comment& The *nternational Character of %ebt, p. +-;
,) 3hich type of bond is denominated in one or more currencies but is traded in e"ternal mar$ets
outside the borders of the countries issuing the currencies6
) international bond
#) domestic bond
C) Eurobond
%) foreign bond
nswer& C
Comment& The *nternational Character of %ebt, p. +-;
-) 3hich type of bond is issued and traded within the internal mar$et of a single country and
denominated in the currency of that country6
) dragon bond
#) domestic bond
C) Eurobond
%) foreign bond
nswer& #
Comment& The *nternational Character of %ebt, p. +-;
7) 3hich $ind of bond is a small but growing component of the international bond mar$et and consists
of two closely related securities6
) international bond
#) domestic bond
C) e0uity!related bond
%) foreign bond
nswer& C
Comment& *nternational #an$ing >egulation, p. 291
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19) 3hat is the name given to the straight fi"ed!rate bond issued in one currency which pays coupon
interest in that same currency, but the promised repayment of principal at maturity is denominated in
another currency6
) international bond
#) dual!currency bond
C) e0uity!related bond
%) foreign bond
nswer& #
Comment& %ual!currency bond, p.+7+
11) 3hat is the name given to the ban$s that perform both traditional commercial ban$ing and
investment ban$ing functions6
) merchant ban$s
#) universal ban$s
C) full!service ban$s
%) affiliate ban$s
nswer&
Comment& #an$s as M4Cs, p.+7=
1.) 3hat is the name given to a small service facility that is staffed by a parent ban$ personnel and
designed to assist the clients of the parent ban$ in their dealings with information about local business
practices and credit evaluation of the M4C<s foreign customers6
) offshore ban$ing center
#) foreign branch of a ban$
C) representative office
%) international ban$ing facility
nswer& C
Comment& >epresentative 5ffices, p.+7-
1+) 3hich of the following represent liabilities to a ban$6
) deposits it accepts from its customers and securities it buys
#) deposits it accepts from its customers, the borrowing it does in security mar$ets and its e0uity capital
C) the borrowing it does in security mar$ets and the loans it provides
%) loans to customers
nswer& #
Comment& *nternational #an$ing )acilities, p.299
12) ________ is the pac$aging of assets or obligations such as mortgages or car loans, into securities for
sale to third parties.
) Eurocredits
#) )loating!rate notes
C) sset securiti/ation
%) %emutuali/ation
nswer& C
Comment& 4ew Capital de0uacy )ramewor$, p. 29.
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1;) 1alue at ris$ measures the dollar loss that a given portfolio position can e"perience with ________
probability over a given length of time.
) 1?
#) +?
C) ;?
%) 19?
nswer& C
Comment& 4ew Capital de0uacy )ramewor$, p. 29.
1=) #an$s that operate in the Eurocurrency mar$ets are $nown as ________.
) euroban$s
#) eurocredit ban$s
C) euronote ban$s
%) international ban$ing facilities
nswer&
Comment& Eurocredits, p. 29+
1,) The long!term debts of euroban$s are $nown as ________.
) @*#5> loans
#) syndicates
C) eurocredits
%) euronotes
nswer& C
Comment& Eurocredits, p. 29+
1-) *nternational ban$s created facilities for sales of short!term, negotiable promissory notes, called
________.
) eurocredits
#) euro commercial paper
C) euro!MT4s
%) euronotes
nswer& %
Comment& Eurocredits, p. 29+
17) The ________ is the discount rate or internal rate of return that e0uates the present value of all the
future interest rate and principal payments to the net proceeds received by the issuer.
) all!in!cost
#) internal rate of return
C) @*#5> rate
%) floating!rate note
nswer&
Comment& The ll!in!Cost :rinciple, p. 297
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.9) *n aAn) ________ the bul$ of the financial activity is with nonresident counterparties.
) representative office
#) offshore ban$ing center
C) correspondent ban$
%) foreign branch of a ban$
nswer& #
Comment& 5ffshore #an$ing Centers, p.+77
11.. Multiple Choice Moderate
1) 3hen an M4C issues low interest rate bonds in another country, what is the ultimate cost of the debt6
) government actions
#) interest rates in the global mar$ets
C) currency movements
%) purchasing power
nswer& C
Comment& Currency %enomination, p.+7+
.) 3hich of the following bonds is least subBect to the regulations of any particular country6
) domestic bonds
#) foreign bonds
C) domestic debentures
%) dragon bonds
nswer& %
Comment& %ragon bonds, p. +71
+) 3hich one of the following mar$ets does an international ban$ participate in that a domestic ban$
would not6
) eurocurrency
#) loan syndicates
C) spot currency
%) forward currency
nswer&
Comment& *nternational #an$ @oans, p.29+
2) 3hy are eurocredits not offered by any one ban$6
) They are typically regulated by the government to e"clude single ban$s.
#) They are typically very large and ban$s prefer to share the ris$ with other ban$s.
C) The denominations are too large for any one ban$<s ability to fund the loan.
%) (ingle ban$s are less li$ely to profit from them.
nswer& #
Comment& Eurocredits, p.29+
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;) 3hich one of the following would 45T contribute to the positive creditworthiness of the firm6
) the firm<s financial structure
#) its profitability
C) the number of ban$ accounts it holds
%) the stability of its cash flows
nswer& C
Comment& Credit (preads cross Countries, p.21;
11.+ (hort nswer
1) 3hat are the three main sources of financing for any firm6
nswer& Corporations rely on three primary types of financing for their capital e"penditures& internally
generated funds, debt financing, and e0uity financing.
.) 3hich one of the two main segments of the international bond mar$et has the least local regulation6
3hy6
nswer& 5ne segment of the international bond mar$et is the foreign bond mar$et, where a foreign
issuer issues bonds in a particular domestic bond mar$et, subBect to local regulations. The other segment
is the Eurobond mar$et, where bonds are issued simultaneously in various mar$ets, outside the specific
Burisdiction of any country. Cence, these bonds are not subBect to the regulations of any particular
country.
+) Cow are the transactions in the global bond mar$et in reality a simultaneous transaction in two
separate mar$ets6
nswer& 'lobal bonds are issued simultaneously in a domestic mar$et and in the Eurobond mar$et, and
they therefore straddle the two segments of the international bond mar$et, ma$ing distinctions between
them more difficult to draw.
2) Cow is the final payment made for a dual!currency bond6
nswer& %ual!currency bonds are issued in one currency and pay interest in that currency, but the final
principal payment is denominated in another currency.
;) 5f the two& a foreign branch and a subsidiary ban$, which one is more subBect to D.(. regulations6
3hy6
nswer& foreign branch of a ban$ is legally a part of the parent ban$, but it operates li$e a local ban$.
)oreign branch ban$s are subBect to both the ban$ing regulations of their home countries and the
countries in which they operate. Cowever, foreign branches of D.(. ban$s are not subBect to D.(. reserve
re0uirements and are not re0uired to have federal deposit insurance. subsidiary ban$ is also wholly or
partly owned by a parent ban$, but it is incorporated in the foreign country in which it is located.
(ubsidiary ban$s are therefore subBect to the ban$ing laws of the countries in which they are
incorporated.
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11.2 Essay
1) Cow has #asel ** affected the capital charge of a loan to another ban$ and a loan to a large M4C6
nswer& Dnder #asel *, claims on other ban$s receive only a .9? weighting, meaning that only .9? of
the claim is counted against the -? capital re0uirement. (ome claims receive a ;9? weighting, but
virtually all claims on the non!ban$ private sector receive a 199? weight and hence the full capital
charge. Cence, the charge for the loan to the M4C would be larger. Dnder #asel **, other ris$s are ta$en
into account Amar$et ris$ and operational ris$), and credit ris$ is measured differently, primarily to better
reflect the true creditworthiness of the borrower. Conse0uently, it is conceivable that the capital charge
for the ban$ loan is larger than for the M4C under #asel **.
.) 3hy is there a need for international ban$ing regulation6
nswer& )irst, central ban$s are concerned that without an international regulatory framewor$ to ensure
that an ade0uate level of capital is maintained in the international ban$ing system, ban$ failures could
lead to a global financial crisis or at least domestic crises could spill over into other countries.
(econd, the variety of different national regulations potentially gives an unfair advantage to ban$s
from countries with la"er regulatory standards, and this could decrease the soundness and safety of the
international ban$ing system overall. *nternational regulations can create a more level playing field that
avoids potential under!regulation if individual regulators compete to see who can be the least strict.
+) 3hat are the maBor features of the proposed #asel ***6
nswer& The currently discussed maBor features of #asel *** are a 1) narrower definition of core capital,
.) a proposed Ecapital conservation bufferE that will serve as additional financial cushion against hard
times, +) the addition of capital re0uirements that fluctuate based on economic conditions, 2) better
li0uidity monitoring to identify economy!wide credit problems, and ;) introduce ma"imum leverage
ratios.
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