International-Financial-Management---Bekaert-2e---Solutions---Ch11.doc

1、11Chapter 11: International Debt FinancingChapter 11International Debt FinancingQUESTIONS1. What are the three main sources of financing for any firm?Answer: Corporations rely on three primary types of financing for their capital expenditures: internally generated funds, debt financing, and equity f

2、inancing.2. What is the difference between a centralized and decentralized debt denomination for a MNC?Answer: Under a decentralized debt-denomination model, MNCs issue debt in different currencies to hedge the cash flows they earn in these currencies from their foreign subsidiaries. Under a central

3、ized model, debt is issued in the currency of the country in which the MNC has its headquarters.3. Will a MNC issuing debt in lowinterest rate currencies necessarily lower its cost of funds? Why?Answer: No. The ultimate cost of the debt will also depend on currency movements. If uncovered interest r

4、ate parity holds, the cost of the low interest rate debt, expressed in the home currency, is expected to be identical to the cost of high interest rate debt. After the fact, the debt will be either less expensive than corresponding debt denominated in the domestic currency, if the foreign currency a

5、ppreciates less than predicted by UIRP; or it will be more expensive if the foreign currency appreciates more than predicted by UIRP.4. Should a MNC borrow primarily short term when short-term interest rates are lower than long-term interest rates? Or should it keep the maturity the same but use a f

6、loating-rate loan rather than a fixed-rate loan? Explain.Answer: First, if short-term interest rates are lower than long-term interest rates, this may be an indication of impending increases in interest rates. In fact, if the expectations hypothesis of the term structure of interest rates holds, the

7、 long rate is simply an appropriately weighted average of short term rates. This implies that “timing” the loan by having a floating interest rate that allows for low interest payments when short rates are low and high interest payments when short rates are high does not add value. Second, the diffe

8、rence between simply borrowing short-term and using a floating rate note is that the latter approach also locks in the MNCs credit spread. If the firm thinks its credit rating will improve over time, it may not want to issue a floating rate note, preferring instead to borrow short-term and borrow ag

9、ain at a better credit spread after the information is incorporated by the market.5. What is financial disintermediation?Answer: This concept refers to the phenomenon in which firms issue securities directly to investors in the capital markets, rather than borrowing from financial institutions that

10、in turn raise funds from the capital markets.6. What are the two main segments of the international bond market, and what types of regulations apply to them?Answer: One segment of the international bond market is the foreign bond market, where a foreign issuer issues bonds in a particular domestic b

11、ond market, subject to local regulations. The other segment is the Eurobond market, where bonds are issued simultaneously in various markets, outside the specific jurisdiction of any country. Hence, these bonds are not subject to the regulations of any particular country.7. What is the difference be

12、tween a foreign bond and a Eurobond?Answer: See the answer to Question 6. 8. Why might U.S. investors continue to purchase Eurobonds, despite the fact that the U.S. corporate bond market is well developed?Answer: The Eurobond market gives them access to bonds of firms that are not available in the U

13、.S. market thereby providing valuable diversification of default risk. Recall that the Eurobond market is a highly liquid, unregulated, convenient market to issue bonds, which has lead to a wide array of available bonds from which investors can choose. Also, Eurobonds are not registered (ownership i

14、s anonymous), and it may therefore allow certain tax avoidance benefits to non-scrupulous investors.9. What is a global bond, and what role does the global bond market play in the blurring of the distinctions in the international bond market?Answer: Global bonds are issued simultaneously in a domest

15、ic market and in the Eurobond market, and they therefore straddle the two segments of the international bond market, making distinctions between them more difficult to draw. 10. What are the differences between a straight bond, a floating-rate note, and a convertible bond?Answer: A straight bond has

16、 no special features. It has a fixed coupon payment and a final principal payment at maturity. A floating-rate note carries a floating interest rate that typically varies with short-term LIBOR. Convertible bonds allow the holder to convert the bonds into a certain amount of stock and therefore have

17、an option feature. 11. What is a dual-currency bond?Answer: Dual-currency bonds are issued in one currency and pay interest in that currency, but the final principal payment is denominated in another currency.12. What kind of activities do international banks engage in?Answer: International banks ty

18、pically develop a complete line of financial services to facilitate the overseas trade of their customers. In addition to commercial credit, these ancillary financial services include market making and trading in spot and forward currencies, international trade financing, and risk management service

19、s. Unlike domestic banks, international banks participate in the Eurocurrency market and are frequently members of international loan syndicates, lending out large sums of money to MNCs or governments. An international bank might also engage in the underwriting of Eurobonds and foreign bonds, which

20、are investment-banking activities. 13. Why is there a need for international banking regulation?Answer: First, central banks are concerned that without an international regulatory framework to ensure that an adequate level of capital is maintained in the international banking system, bank failures c

21、ould lead to a global financial crisis or at least domestic crises could spill over into other countries.Second, the variety of different national regulations potentially gives an unfair advantage to banks from countries with laxer regulatory standards, and this could decrease the soundness and safe

22、ty of the international banking system overall. International 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. 14. What are the differences between credit risk, market risk, and operational r

23、isk?Answer: Credit risk is the risk that a company or government will default on its promised payments on a loan or a bond. Market risk is the risk of losses in trading positions when prices move adversely. Operational risk is the risk of direct or indirect loss resulting from inadequate or failed i

24、nternal processes, people, and systems or from external events, such as computer failure, poor documentation, or fraud.15. What is systemic risk?Answer: Systemic risk is the possibility that failure in one part of the financial system spills over into failure of a large part of the financial system.

25、 A worst case scenario would be a complete breakdown of financial intermediation.16. Which activity would require the largest capital charge under the 1988 Basel Accord: a loan to another bank or a loan to a large MNC? Would this necessarily be true under the Basel II rules?Answer: Under Basel I, cl

26、aims on other banks received only a 20% weighting, meaning that only 20% of the claim would be counted against the 8% capital requirement. Some claims received a 50% weighting, but virtually all claims on the non-bank private sector received a 100% weight and hence the full capital charge. Hence, th

27、e charge for the loan to the MNC would be larger. Under Basel II, other risks are taken into account (market risk and operational risk), and credit risk is measured differently, primarily to better reflect the true creditworthiness of the borrower. Consequently, it is conceivable that the capital ch

28、arge for the bank loan is larger than for the MNC under Basel II. 17. What is VaR?Answer: VaR stands for Value at Risk and measures the dollar loss that a given portfolio position can experience with a probability over a given length of time. For example, a 95% VaR of $1 million over a day for a por

29、tfolio manager implies that the portfolio should lose no more than $1 million on any particular day with more than 5% probability.18. What is the difference between a foreign branch and a subsidiary bank?Answer: A foreign branch of a bank is legally a part of the parent bank, but it operates like a

30、local bank. Foreign branch banks are subject to both the banking regulations of their home countries and the countries in which they operate. However, foreign branches of U.S. banks are not subject to U.S. reserve requirements and are not required to have U.S. federal deposit insurance. A subsidiary

31、 bank is also wholly or partly owned by a parent bank, but it is incorporated in the foreign country in which it is located. Subsidiary banks are therefore subject to the banking laws of the countries in which they are incorporated. 19. What is an offshore center?Answer: Offshore banking centers con

32、duct international banking activities in a “lightly” regulated setting. Most of the transactions involve nonresidents as counterparties; the transactions are typically initiated outside the financial center, and the majority of the financial institutions involved are controlled by nonresidents who do business primarily with nonresidents. Offshore banking centers can be found in places such as Aruba, the Cayman Islands, and parts of the West Indies.20. What is the difference