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FIN 475 Final

Terms in this set (62)

Suppose the quote for a 5 year swap with semi-annual payments is 8.50-8.60 against six month LIBOR flat. This means...
The swap bank will pay semi-annual fixed rate dollar payments of 8.50% against receiving 6 month dollar LIBOR, or it will receive semi-annual fixed rate dollar payments at 8.60 percent against paying 6 month dollar libor
Reference rate is...
The market rate on which the interest on a floating rate loan is based
Which of the following statements is true about a loan with an interest rate of US dollar LIBOR +2%?
The 2% spread is fixed
A swap from fixed yen payments to floating rate dollar payments is?
Interest rate/Currency Swap
The primary reasons for a counter party to use a currency swap are?
To obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counter-party has in it's national capital market, and the benefit of hedging long run exchange rate exposure
In a currency swap...
It may be the case that the two counter-parties have equivalent credit ratings

It may be the case that the firms have a comparative advantage in borrowing in their domestic markets
An interest only, single currency interest rate swap...
Plain vanilla swap

Interest rate swap

As simple as it gets
A major risk faced by a swap dealer is sovereign risk. This is...
The probability that a country will impose exchange restrictions on a currency involved in an existing swap
Consider a plain vanilla interest rate swap. Firm A can borrow at 8% fixed or can borrow floating at LIBOR. Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%. Firm A wants to borrow floating and Firm B prefers to borrow fixed. Both corporations wish to borrow $10 million for 5 years. Which of the following swaps is mutually beneficial to each party and meets their financing needs?
Firm A borrows $10 million externally at 8% fixed for 5 years... Agrees to swap LIBOR to Firm B for 8.5% fixed for 5 years on a notational principle of $5 million. Firm B borrows $10 million externally at LIBOR +1%.
A __________ is a bond that is sold in countries other than the country in whose currency it is denominated.
Eurobond
Selling stock overseas is attractive to corporations because it...
Improves the company's visibility in foreign markets
Globalization of financial markets reflects...
Financial deregulation, which spurs competition among markets

Reductions in currency controls and other government restrictions on the free flow of capital internationally

New technology that has lowered the cost of information
If the current 180-day inter-bank Eurodollar rate is 15% (all rates are stated on an annualized basis) and next period's LIBOR is 13%, then a Eurocurrency loan priced at LIBOR plus 1% will cost
16% this period, and 14% next period
International diversification provides a better risk return trade off than does investing solely in US securities because...
The economic cycles of nations are not perfectly synchronous
While there is systematic risk within a nation, it may be nonsystematic and __________ outside the country after constructing a global portfolio
Diversifiable
__________ are certificates of ownership by a US bank as a convenience to investors in lieu of the underlying shares it holds in custody
American depository receipts
Major distinguishing features between domestic banks and international banks are...
Types of deposits they accept

Types of loans and investments they make

Membership in loan syndicates
A domestic bank that follows a multinational client abroad to preserve that banking relationship is...
Pursuing a wholesale defensive strategy
A bank may establish a multinational operation for the reason of low marginal costs. Their underlying rationale being that...
Managerial and marketing knowledge developed at home can be used abroad with low marginal costs
A bank may establish a multinational operation for the reason of regulatory advantage. The underlying rationale being that...
Multinational banks are often not subject to the same regulations as domestic banks. There may be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions.
In reference to capital requirements...
Bank capital adequacy refers to the amount of debt capital a bank holds as reserves against risky assets to reduce the probability of bank failure
Eurocurrency
Is a time deposit of money in an international bank located in a country different from the country that issued the currency
LIBOR
London InterBank Offered Rate

The reference rate in London for Eurodollar deposits

One of several reference rates in London, there is LIBOR for Eurodollars, EuroYen, EuroCanadian, and even Euro.
Eurocredits
Are often so large that individual bank cannot handle them

Are short to medium term loans of Eurocurrency extended by Eurobanks to corporations, sovereign governments, nonprime banks, or international organizations

Frequently require the use of a banking syndicate
Eurocredits feature rollover pricing
Rollover pricing was created on Eurocredits so that Eurobanks do not end up paying more on Eurocurrency time deposits than they earn from the loans.

Because of the rollover pricing feature, a Eurocredit may be viewed as a series of shorter-term loans, where at the end of each time period (generally three or six months), the loan is rolled over and the base lending rate is repriced to current LIBOR over the next time interval of the loan.

The lending rate on these Eurocredits is stated as LIBOR + X percent, where X is the lending margin charged depending upon the creditworthiness of the borrower. LIBOR is reset according to a set schedule.
A forward rate agreement (FRA) is an agreement between two banks...
That allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits

In which the buyer agrees to pay the seller the increased interest cost on a notational amount if interest rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate

That is structured to capture the maturity mismatch in standard length Eurodeposits and credits
The four currencies in which the majority of domestic and international banks are denominated are...
US Dollar

Euro

Pound

Yen
A "Eurobond" issue is...
One denominated in a particular currency, but sold to investors in national capital markets other than the country that issued the denominating currency

Usually a bearer bond
A bearer bond is one that...
Possession is evidence of ownership
A registered bond is one that...
Shows the owners name on the bond

The owners name is recorded by the issuer

The owners name is assigned to a bond serial number recorder by the issuer
US security regulations require Yankee bonds, and US corporate bonds sold to US citizens to be...
Registered bonds
Eurobonds are usually...
Bearer bonds
Investors will generally accept a lower yield on ______ than on ______ of comparable terms, making them a less costly source of funds for the issuer to service
Bearer bonds; Registered bonds
Securities sold in the United States to public investors must be registered with the SEC, and a prospectus disclosing detailed financial information about the issuer must be provided and made available to prospective investors. This encourages foreign borrowers wishing to raise U.S. dollars to use...
The Eurobond market
The Eurobond segment of the international bond market is
Is roughly 4x larger than the foreign bond segment

Has considerably less regulatory hurdles than the foreign bond segment

Typically has a lower rate of interest that borrowers pay in comparison to Yankee bond financing
Private placement bond issues...
Do not have to meet the strict information disclosure requirements of publicly traded issues
SEC Rule 144A
Allows qualified institution investors in the United States to trade private placements

Was designed to make the US capital market more competitive with the Eurobond market

Primarily, but not exclusively impacts Yankee bonds
Bonds with equity warrants
Can be viewed as straight debt with a call option (technically a warrant) attached
The role of an underwriter is to...
Help negotiate terms with the borrower

Ascertain market conditions

Manage the issuance
The market capitalization of the developed world...
Is about 85% of the market capitalization of the entire world
In general, Standard and Poor's Emerging Markets Database classified a stock market as "emerging" if...
It is located in a low or middle income country as defined by the world bank

It's investable market capitalization is low relative to most recent GNI figures
Investment in foreign equity markets...
Is no longer considered a "backwater" in the field of finance

Became common practice in the 1980's as investors diversified their portfolios

During the 1980's was largely confined to the developed world
Many of the larger emerging markets (Korea, India) ...?
Have high liquidity
The secondary equity markets of the world serve two major purposes. They provide...
Marketability and share valuation
iShares MSCI are...
Exchange traded funds that are subject to US SEC and IRS diversification requirements
A firm may cross-list it's share to...
Establish a broader investment base for it's stock

Establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets

Expose the firms name to broader investor and consumer groups
Following monetary union and the advent of the Euro...
Development of common securities regulations, even among members of the European Union has not occurred yet...
American Depository Receipts (ADR's) represent foreign stocks...
Denominated in US dollars that trade on a US stock exchange
ADR's...
Are American Depository Receipts

Denominated in US dollars that trade on a US stock exchange

Are depository receipts for foreign stocks held by the US depository's custodian
50
Look into this one
What was the Basel accord and how was it modified?
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53
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In a currency swap, a company makes an internal spot transaction with it's subsidiary...
False - In a swap, two counter-parties agree to a contractual arrangement wherein they will exchange cash flows at periodic intervals
Translation Exposure is the risk of value changes to subsidiary cash flows...
False - (Look up definition for translation exposure)
It is possible for a swiss subsidiary of a US company to have a functional currency that is neither the swiss franc, or the dollar...
True. the functional currency can be determined by wherever the company does most of it's business, and sales are generated in that currency...
What is the central problem in consolidating the financial statements of a foreign subsidiary?
Determining the best exchange rate to use for translating different line items
When exchange rates change...
Value of a foreign subsidiaries foreign currency denominated assets and liabilities change when re-denominated into the home currency
The currency of the primary economic environment in which the entity operates is defined in the FASB 52 as...
The functional currency
Suppose a US firm has a swiss subsidiary. Which of the following is a possible functional currency of the Swiss subsidiary?
Swiss Franc, US Dollar, Euro, Yen... Just needs to be the currency of the primary economic environment in which the entity operates
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