You are the investment banker for both Bank M and Retailer W. Both of your clients have expressed a desire to borrow euros for 10 years, which would normally mean each would tap the European bond market for funds. However, you first analyze each company's current 10- year borrowing costs in the U.S. and Japanese bond markets as well, which are provided in the Table immediately below: 

U.S. Bond Market European Bond Market Japanese Bond Market 

Bank M 3.25% 1.50% 1.05% 

Retailer W 3.25% 1.65% 1.45%

a) In which of these three markets, if any, does Bank M have a comparative borrowing advantage over Retailer W? In which market(s), if any, does Retailer W have a comparative advantage over Bank M?

b)

10 Years U.S. Europe Japan Government 

Yield 2.50% 0.75% 0.40% 

FX Swap Bid/Ask +30 / +34 +22 / +26 +25 / +28

Note: Swap quotes, which consist of the government yield plus the applicable spreads, represent all-in fixed rates of interest in the local currency against 3- month euro Libor flat. Swap bid/ask spreads are in basis points per annum. If Bank M issued 10-year bonds in the market in which it had the greatest comparative advantage and simultaneously executed a currency swap into fixed rate euros.

What would be its synthetic cost? 

c) If Bank M issued the equivalent of 200 million euros of bonds in the market in which it has the greatest comparative advantage.

 What would be the present value savings of that issue relative to issuing 10-year bonds denominated in euros?

Answer rating: 100% (QA)

SOLUTION a Bank M has a comparative borrowing advantage over Retailer W in the European and Japanese ... View the full answer