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Questions and Answers of Finance

How does the deposit-loan rate spread in the Eurodollar market compare with the deposit-loan rate spread in the domestic U.S. banking system? Why?
What is the difference between the Euronote market and the Eurocommercial paper market?
Briefly discuss the cause and the solution(s) to the international bank crisis involving less-developed countries.
What were the weakness of Basel II that become apparent during the global financial crisis that began in mid-2007?
Discuss the regulatory and macroeconomic factors that contributed to the credit crunch of 2007-2008.
How did the credit crunch become a global financial crisis?
Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a six-month rollover basis from a London bank. If six-month LIBOR is 4½
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest rate
Assume the settlement rate in problem 2 is 61/8 percent. What is the solution now?Problem 2A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three months from today
A "three against nine" FRA has an agreement rate of 4.75 percent. You believe six-month LIBOR in three months will be 5.125 percent. You decide to take a speculative position in a FRA with a
Recall the FRA problem presented as Example 11.2. Show how the bank can alternatively use a position in Eurodollar futures contracts to hedge the interest rate risk created by the maturity mismatch
The Fisher effect (Chapter 6) suggests that nominal interest rates differ between countries because of differences in the respective rates of inflation. According to the Fisher effect and your
George Johnson is considering a possible six-month $100 million LIBOR-based, floating-rate bank loan to fund a project at terms shown in the table below. Johnson fears a possible rise in the LIBOR
Jacob Bower has a liability that:â€¢ has a principal balance of $100 million on June 30, 1998,â€¢ accrues interest quarterly starting on June 30, 1998,â€¢ pays interest quarterly,â€¢
It is September 1990 and Detroit Motors of Detroit, Michigan, is considering establishing an assembly plant in Latin America for a new utility vehicle it has just designed. The cost of the capital
Explain how Eurocurrency is created.
What is a mortgage-backed security?
What are structured investment vehicles and what effect did they have on the credit crunch?
What are collateralized debt obligations and what effect did they have on the credit crunch?
Describe the differences between foreign bonds and Eurobonds. Also discuss why Eurobonds make up the lion's share of the international bond market.
Briefly define each of the major types of international bond market instruments, noting their distinguishing characteristics.
Why do most international bonds have high Moody's or Standard & Poor's credit ratings?
What factors does Standard & Poor's analyze in determining the credit rating it assigns to a sovereign government?
Discuss the process of bringing a new international bond issue to market.
You are an investment banker advising a Eurobank about a new international bond offering it is considering. The proceeds are to be used to fund Eurodollar loans to bank clients. What type of bond
What should a borrower consider before issuing dual-currency bonds? What should an investor consider before investing in dual-currency bonds?
Your firm has just issued five-year floating-rate notes indexed to six-month U.S. dollar LIBOR plus 1/4 percent. What is the amount of the first coupon payment your firm will pay per U.S. $1,000 of
Consider 8.5 percent Swiss franc/U.S. dollar dual-currency bonds that pay $666.67 at maturity per SF 1,000 of par value. It sells at par. What is the implicit SF/$ exchange rate at maturity? Will
A five-year, 4 percent Euro yen bond sells at par. A comparable risk five-year, 5.5 percent yen/dollar dual-currency bond pays $833.44 at maturity per¥100,000 of face value. It sells for ¥110,000.
Sara Lee Corp. is serving up a brand name and a shorter maturity than other recent corporate borrowers to entice buyers to its first-ever dollar Eurobonds. The U.S. maker of consumer products, from
Exhibit 13.11 presents a listing of major national stock market indexes as displayed daily in the print edition of the Financial Times. At www.ft.com. you can find an online tracking of these
As an investor, what factors would you consider before investing in the emerging stock market of a developing country?
Compare and contrast the various types of secondary market trading structures.
Discuss any benefits you can think of for a company to (a) Cross-list its equity shares on more than one national exchange, and (b) To source new equity capital from foreign investors as well as
Why might it be easier for an investor desiring to diversify his portfolio internationally to buy depository receipts rather than the actual shares of the company?
Why do you think the empirical studies about factors affecting equity returns basically showed that domestic factors were more important than international factors, and, secondly, that industrial
On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥2,717 per share on Thursday, July 29.2010. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On July
If Honda ADRs were trading at $34 when the underlying shares were trading in Tokyo at ¥2, 717, what could you do to earn a trading profit? Use the information in problem 1 to help you, and assume
San Pico is a rapidly growing Latin American developing country. The country is blessed with miles of scenic beaches that have attracted tourists by the thousands in recent years to new resort hotels
Describe the difference between a swap broker and a swap dealer.
What is the necessary condition for a fixed-for-floating interest rate swap to be possible?
Discuss the basic motivations for a counterparty to enter into a currency swap.
How does the theory of comparative advantage relate to the currency swap market?
Discuss the risks confronting an interest rate and currency swap dealer.
Briefly discuss some variants of the basic interest rate and currency swaps diagrammed in the chapter.
If the cost advantage of interest rate swaps would likely be arbitraged away in competitive markets, what other explanations exist to explain the rapid development of the interest rate swap market?
Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75-8.10 percent annually against six-month dollar LIBOR for dollars and 11.25-11.65 percent annually against six-month dollar LIBOR
A U.S. company needs to raise €50,000,000. It plans to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to Euros. The company expects interest
Assume a currency swap in which two counterparties of comparable credit risk each borrow at the best rate available, yet the nominal rate of one counterparty is higher than the other. After the
Alpha and Beta Companies can borrow for a five-year term at the following rates:a. Calculate the quality spread differential (QSD).b. Develop an interest rate swap in which both Alpha and Beta have
Do problem 1 over again, this time assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8%
Company A is an AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNs at six-month LIBOR + .125 percent or at three-month LIBOR + .125 percent. Given its asset structure,
A corporation enters into a five-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed rate of 9.75 percent annually on a notional amount of €15,000,000 and
DVR, Inc. can borrow dollars for five years at a coupon rate of 2.75 percent. Alternatively, it can borrow yen for five years at a rate of .85 percent. The five-year yen swap rates are 0.64-0.70
Karla Ferris, a fixed income manager at Mangus Capital Management, expects the current positively sloped U.S. Treasury yield curve to shift parallel upward.Ferris owns two $1,000,000 corporate bonds
Rone Company asks Paula Scott, a treasury analyst, to recommend a flexible way to manage the company's financial risks.Two years ago, Rone issued a $25 million (U.S.$), five-year floating-rate note
A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company
Ashton Bishop is the debt Manager for World Telephone, which needs €3.33 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in:Euros
The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave
Suppose that one year after the inception of the currency swap between Centralia and the Spanish MNC, the U.S. dollar fixed-rate has fallen from 8 to 6 percent and the euro zone fixed-rate for euros
Bedford Mattress Company issued preferred stock many years ago. It carries a fixed dividend of $8 per share. With the passage of time, yields have gone down from the original 8 percent to 6 percent
The Good smith Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 20 percent
The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the after-tax cost of debt is at least
United Business Forms’ capital structure is as follows:Debt ............................................. 35%Preferred stock ................................. 15Common equity
Use the following information for questions 29-33. A corporation has 8,000,000 shares of stock outstanding at a price of $50 per share. They just paid a dividend of $2 and the dividend is expected to
LCI has the following capital structure, which it considers to be optimal: debt 25%, preferred stock 15% and common stock 60%. LCI’s tax rate is 40%, and investors expect earnings and dividends to
CCC Corp. has beta 1.5 and is currently in equilibrium. Required rate of return on stock is 12% versus required return on average stock which is 10%. Now the required return on average stock
Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY). It paid a dividend of $0.70 today and then you sold it for $65. What was your return on the investment?A) 8.25% B)
Southwest Physicians, a medical group practice, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a profit
Suppose you invested $98 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.47 today and then you sold it for $99. What was your dividend yield and capital gains yield on the
Suppose you plan to create a portfolio with two securities: A and B. A has an expected return of 35% with a standard deviation of 22%. B has an expected return of 20% with a standard deviation of
B4. (Capital structure weights) The required return on debt (before taxes) is 7.5%, the required return on equity is 15%, and the cost of capital is 10%. If the marginal income tax rate is 40%,
Winfrey Diet Food Corp. has $4,500,000 in asset Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $960,000. The tax rate is 40 percent.Temporary
The market expected return is 8% with a standard deviation of 18%. The risk free rate is 3.5%. Security XYZ has just paid a dividend of $5 and has a current price of $80. What is the beta of
The expected return of Security A is 10% with a standard deviation of 20%. The expected return of Security B is 15% with a standard deviation of 30%. Securities A and B have a correlation of 0.3.
Suppose you own a two-security portfolio. You have 54% of your money invested in Security X and the remainder in Security Y. The standard deviations of Securities X and Y are 30 percent and 25
Stock A: expected return= 10%; standard deviation= 40%Stock B: expected return= 20%; standard deviation= 23%You short sold 200 shares of A at 15 $ per share and purchased 500 shares of B at 15$ per
You are considering three stocks for investment purposes. The required return on the market portfolio is 14%, and the riskless return is 9%. Based on the information given, in which (if any) of these
The information given here has been gathered about O’ryan Swim- Where, Ltd.Based on this information, estimate O’ryan’s WACC.Current market value of common shares (10 million outstanding)
Hayward Corporation has debt/assets ratio of .4, its cost of debt is 9% and that of equity 13%. The tax rate of Hayward is 30%. The company is not growing, has a dividend payout ratio of 100%, and
A company wishes to determine if the average salary of its clerks is really $340. The company researcher takes a sample of 64 clerks and finds that =$300 and s = $80.a) Test at = 0.05.b) Construct a
The return expected from Project No. 542 is 22 percent. The standard deviation of these returns is 11 percent. If returns from the project are normally distributed, what is the chance that the
A bank manager wants to determine the percent of time that tellers are working and idle. She decides to use work sampling, and her initial estimate is that the tellers are idle 30 percent of the
The following are the monthly rates of return for Madison Corp. and for Sophie Electric during a six-month period.a. Compute the average monthly rate of return for each stock.b. Compute the standard
You own a $1000 par zero-coupon bond that has 5 years of remaining maturity. You plan on selling the bond in one year and believe that the required yield next year will have the following probability
Why do banks (depositories) have such high ratios of debt to assets (heavy use of financial or debt leverage)?
The CFO of your firm has asked you for an approximate answer to this question: What was the increase in real purchasing power associated with both 3-month Treasury bills and 30-year Treasury bonds?
You can either spend spring break working at home for $80 per day for five days or go to Florida for the week. If you stay home, your expenses will total about $100. If you go to Florida, the
Emma, the sole shareholder of Quail Corporation (a C corporation), has the corporation pay her a salary of $300,000 in 2008. The Tax Court has held that $80,000 represents unreasonable compensation.
Consider Pacific Energy Company and U.S. Blue chips, Inc., both of which reported earnings of $750,000. Without new projects, both firms will continue to generate earnings of $750,000 in perpetuity.
In February 2009 Treasury 6s of 2026 offered a semiannually compounded yield of 3.5965%. Recognizing that coupons are paid semiannually, calculate the bond's price. Include settlement date, maturity
Cottonwood received their new product catalogs ordered from a local print shop. The print shop billed Cottonwood $6,000 for 5,000 catalogs with payment terms of net 10. Cottonwood considers catalogs
A 6-year bond pays interest of $80 annually and sells for $950. What are its coupon rate, current yield, and yield to maturity?
Presented below are the captions of Chan Company’s balance sheet. (a) Current assets.(b) Investments.(c) Property, plant, and equipment.(d) Intangible assets.(e) Other assets.(f) Current
Gannon Company acquired 6,000 shares of its own common stock at $20 per share on February 5, 2010, and sold 3,000 of these shares at $27 per share on August 9, 2011. The market value of Gannon's
The Hamster Stop has $93,650 in the Accrued Payroll account. Hamster's weekly payroll is $156,000 and the accrual represents payroll for 3 days. If controls are strong, determine whether additional
Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by
Given the following statement, please indicate whether it is true or false, and why: “Managerial finance is concerned with design and delivery of advice and financial products to individuals,
"Steve, who is single, has $100,000 of salary, $10,000 of income from a limited partnership, and a $25,000 passive loss from a real estate rental activity in which he actively participates. His
On October 1, 2012, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren’s management along with its counsel have concluded that it

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