International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Sambuka, Inc. can issue annual coupon bonds in either U.S. dollars or in Euros that mature in threeyears. Dollar-denominated bonds would have a coupon rate of 5 percent; Euro-denominated bonds would have a coupon rate of 4 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in US dollars or 8 million Euros, given that the current exchange rate is $1.25/1 Euro.
If the forecasted exchange rate for the Euro is $1.21for each of the next three years what is the annual cost of financing for the Euro-denominated bonds? Which type of bond should Sambuka issue?
The current exchange rate is 0.8000 Swiss francs per dollar. A5-year U.S. government bond has a 3% yield, and a 5-year Swissgovernment bond has a yield of 2%. What is the expected 5-yearforward rate? (0.7619 Swiss francs per dollar) (Hint: Rememberthat the interest rate parity equation is for direct quotes.)
New Hampshire Corp A. New Hampshire Corp. has decided to issue three-year bonds in Russia, denominated in 5,000,000 Russian rubles at par. The bonds have an annual coupon rate of 17%. New Hampshire Corp does not expect to have ruble cash flows to repay the bonds, so they must convert U.S. dollars to rubles to make interest and principal payments on the bonds. The current spot rate is Rub 33.3333/$. Assume relative PPP holds between Russia and the U.S. If inflation in Russia is 5% and is 1% in the U.S., and is expected to remain constant over the three-year life of the bonds, what is the annual U.S. dollar financing cost of these bonds? (HINT: Draw a timeline with the annual Rub cash flows, the annual exchange rates and the annual USD cash flows on it.)
A.
10.66%
B.
12.54%
C.
14.87%
D.
19.29%
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- The nominal yield on 6-month T-bills is 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0,009. If interest rate parity holds, what is the 6-month forward exchange rate?arrow_forwardAssume that Seminole, Inc., considers issuing a Singapore dollar–denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the bond payments. It is attracted to the low financing rate because U.S. dollar–denominated bonds issued in the United States would have a coupon rate of 12 percent. Assume that either type of bond would have a four-year maturity and could be issued at par value. Semi-nole needs to borrow $10 million. Therefore, it will issue either U.S. dollar–denominated bonds with a par value of $10 million or bonds denominated in Singapore dollars with a par value of S$20 million. The spotrate of the Singapore dollar is $.50. Seminole has forecasted the Singapore dollar’s value at the end of each ofthe next four years, when coupon payments are to be paid. Determine the expected annual cost of financingwith Singapore dollars. Should Seminole, Inc., issue bonds denominated in U.S. dollars or Singapore dollars? Explain. END OF…arrow_forwardIBM is considering having its German affiliate issue a 10-year, $100 million bond denominated in euros and pricedto yield 7.5%. Alternatively, IBM’s German unit can issuea dollar-denominated bond of the same size and maturityand carrying an interest rate of 6.7%.a. If the euro is forecast to depreciate by 1.7% annually, what is the expected dollar cost of the eurodenominated bond? How does this compare to the costof the dollar bond?b. At what rate of euro depreciation will the dollar cost ofthe euro-denominated bond equal the dollar cost of thedollar-denominated bond?c. Suppose IBM’s German unit faces a 35% corporate taxrate. What is the expected after-tax dollar cost of theeuro-denominated bond?arrow_forward
- Suppose you (U.S. investor) purchase a 5-year, AA-rated Euro bond for par that is paying an annual coupon at the rate equal to 8 percent. The bond has a face value of 1,000 Euros. The spot exchange rate at the time of purchase is USD1.15/EUR. At the end of the year 1, the bond is upgraded to AAA-rated and the yield changes to 7.5% per annum continuous compounding. In addition due to changes in macroeconomic environment, the exchange rate also changed to USD1.25/EUR. Assume that a U.S. investor holds this bond for one year and sells it in the market at the end of year 1. EUR is the abbreviation for Euro and USD is the abbreviation for U.S. dollar. What is the overall gain / loss in U.S. dollars for the U.S. investor at the end of year 1 (t = 1 year)? (Roundoff your answer to four decimal places, in order to get as accurate answer as possible on Canvas. If your answer is -$1.2345, loss of $1.2345, then type your answer as -1.2345.)arrow_forwardEven though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 9 years to maturity, and a coupon rate of 8.1 percent paid annually. If the YTM is 10.1 percent, what is the current bond price in euros?arrow_forward
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