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Multiple Choice Questions on International Finance

1. Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in Indian rupees (RS). The current exchange rate of the rupee is $.025. Thus, the MNC needs ___________ rupees to obtain the $1,000,000 needed.
A) 50,000,000
B) 20,000
C) 1,000,000
D) 40,000,000

2. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:

Fixed Rate Bond Variable Rate Bond
Good Company 10% LIBOR + 1%
Bad Company 12% LIBOR + 1.5%

Given this information:
A) an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.
B) an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
C) an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
D) none of the above.

Solution Preview

1. Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in Indian rupees (RS). The current exchange rate of the rupee is $.025. Thus, the MNC needs ___________ rupees to obtain the $1,000,000 needed.
A) 50,000,000
B) 20,000
C) 1,000,000
D) 40,000,000

Answer: D) 40,000,000

Echange rate= $0.025 /Rs
Amount needed= $1,000,000
Therefore, amount in Rs= 40,000,000

2. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:

                                           Fixed Rate Bond        Variable Rate Bond
Good Company      10%                LIBOR + 1%
Bad Company        12%                ...

Solution Summary

Answers to 2 Multiple Choice Questions on International Finance.

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