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Finance Case Study

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Short answer questions:

1. An international bank loaned money to an emerging country a few years ago. Because of the nonpayment of interest due on this loan, the bank is now negotiating with the borrower to exchange the loan for Brady bonds. The Brady bonds that would be issued would be either par bonds or discount bonds with the same time to maturity.

a. Would both types of bonds, par and discount provide debt reduction to the emerging country?

Both par bonds and discount bonds could be exchanged for the amount of the existing debt which would reduce the country’s debt. The par bond could “be exchanged dollar for dollar for existing debt” (Solnik & McLeavey, 2013, p. 270). However, the discount bond would replace a smaller part of the…show more content…
303). Subsequently issued bonds after the drop in yen bonds, in the short-term, will probably be set with lower coupon rates making the fixed terms of the already issued dual-currency bond valuable.

b. The dollar drops in value relative to the yen

The value of the bond will decrease if the dollar drops. The depreciation in the currency that the bond will pay the principal in makes the bond less valuable to investors.

c. The market interest rate on dollar bonds drops significantly

3. A european corporation has issued bonds with a par value of Sfr 1,000 and an annual coupon of 5 percent. The last coupon on these bonds was paid four months ago, and their current clean price is 90 percent.

a. If these bonds are international bonds, what is their full price?

Full Price = 90% clean price + 5% coupon rate (120 days since last coupon payment/ 360 days in the year for annual bond)

Full Price = 0.90 + 0.05(120/360) = 0.9166

Full price is 91.67%

b. Would your answer to part a be different if the bonds were not international bonds, but were issued in the Swiss domestic bond market?

The answer would not change because the 30/360 count “is used in Germany, Scandanavia, Switzerland, and the Netherlands” (Solnik & McLeavey, 2013, p. 273).

4. Consider a bond issued at par. The annual coupon is 8 percent and frequency of coupon is semiannual. How would the YTM of this bond be reported in most of the European markets?

8% coupon/2 times per
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