Selecting a Loan Maturity Omaha Co. has a subsidiary in Chile that wants to borrow from a local bank at a fixed rate over the next 10 years. Explain why Chile’s term structure of interest rates (as reflected in its yield curve) might cause the subsidiary to borrow for a different term to maturity. If Omaha is offered a more favorable interest rate for a term of 6 years, explain the potential disadvantage compared to a 10 -year loan. Explain how the subsidiary can determine whether to select the 6 -year loan or the 10 -year loan.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 18, Problem 19QA
Textbook Problem

Selecting a Loan Maturity Omaha Co. has a subsidiary in Chile that wants to borrow from a local bank at a fixed rate over the next 10 years.

  1. Explain why Chile’s term structure of interest rates (as reflected in its yield curve) might cause the subsidiary to borrow for a different term to maturity.
  2. If Omaha is offered a more favorable interest rate for a term of 6 years, explain the potential disadvantage compared to a 10 -year loan.
  3. Explain how the subsidiary can determine whether to select the 6 -year loan or the 10 -year loan.

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