1. ABC Corporation, a Canadian firm, wants to float a bond issue in the United Kingdom. Which choices does the company have? Discuss the main characteristics of each option. What do you recommend? Answer: ABC Corporation can issue foreign bonds (Bulldogs) or Eurobonds. Foreign bonds are bonds issued by a foreign borrower in a national market, in the national currency, and subject to the national securities regulations. Eurobonds are bonds sold in countries other the country that issued the denominating currency. Foreign bonds tend to be registered bonds and subject to the local regulations while Eurobonds tend to be bearer bonds. Generally, foreign bonds are more costly than Eurobonds. Therefore, Eurobonds are likely the better option. page: 157-158
2. A- Canada Inc. has issued a dual-currency bond that pays $555.10 at maturity per SF1,000 of par value. The company’s cash flows are exclusively in Canadian dollars. a) What is the implicit $/SF exchange rate at maturity?
b) Will the company be better or worse off if the actual exchange rate at maturity is $0.6123/SF? Answer: a) $555.10/SF 1,000 = $ 0.5551
b) The company will be better off.
Page: 175, problem 3
3. ZZZ Corp. wants to issue zero-coupon bonds with a 10-year maturity. The implied yield to maturity on these bonds is 5% and ZZZ Corp. wants to raise $10,000,000. (Assume no transaction costs). How much money will ZZZ Corp. have to pay at maturity of the bond? Answer: 10,000,000 (1.05)10 = $16,288,946.27
4. Assume Bank of Montreal has two zero-coupon bonds outstanding, each for a face value $100,000,000. Bond A matures in 10 years and sells at a discount of 35% off face value and bond B matures in 20 years and sells at a discount of 60% off face value. Calculate the implied yield to maturity of each bond. Answer:
650,000,000(1 + i)10 = 100,000,000
i = 4.4%
400,000,000(1 + i)20 = 100,000,000
i = 4.67%
5. What happens to the present value of the bonds in 4., if the implied yield to maturity increases by 1%? Answer:
100,000,000/(1.054)10 = 59,100,872.35
The present value of the bond decreases by 65,000,000 59,100,872.35 = 5,899,127.65
100,000,000/(1.0567)20 = 33,186,836.18
The present value of the bond decreases by 40,000,000 33,186,836.18 = 6,813,163.82
1. Assume that Nestle shares are trading at SF 300 in Zurich and $ 51 in New York. Each share equals 4 ADRs. The current exchange rate is SF1.5/$. In the absence of transaction costs, can you make an arbitrage profit? Answer:
Yes. Buy one share in Zurich for SF 300 or $ 200 (300/1.5), exchange to ADRs and sell the ADRs for 4*51 = $204; profit $4
2. Assume that Nestle shares are trading at SF 300 in Zurich and $ 51 in New York. Each share equals 4 ADRs. The current exchange rate is SF1.5/$. If transaction costs are $1 per ADR, can you make an arbitrage profit? Answer: No, transaction costs = potential profit
Potential profit in the absence of transaction costs:
Buy one share in Zurich for SF 300 or $ 200 (300/1.5), exchange to ADRs and sell the ADRs for 4*51 = $204; profit $4
3. What factors go into the decision to cross-list on a foreign exchange? Answer:
When deciding whether to cross-list shares on a foreign exchange, the firm has to consider the expected benefits and costs. The benefits may be: to establish a broader investor base for its stock, to establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets, and to expose the firm’s name to a broader investor and consumer groups. The costs include: listing fees, reconciliation of the accounting standards of two countries, compliance with the regulations of the foreign exchange, and investor relations. page: 187.
4. Assume that Accor shares are trading at A$2.5 in Sydney and $28 in New York. Each ADR equals 20...