1. Discuss four (4) advantages and four (4) disadvantages accruing to a company that is traded in the public securities markets.
2. Garland Corporation has a bond outstanding with a $90 annual interest payment, a market price of $820, and a maturity date in five years. Find the following:
a. The coupon rate
b. The current rate
c. The approximate yield to maturity
3. An investor must choose between two bonds: Bond A pays $92 annual interest, has a market value of $875, and has 10 years to maturity. Bond B pays $82 annual interest, has a market value of $900, and has two years to maturity.
a. Compute the current yield on both bonds.
b. Based on your computations above, which bond should the investor select?
c. A drawback on the current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.30%. What is the approximate yield to maturity on Bond B?
d. Has your answer changed between parts “b” and “c” of this question in terms of which bond to select? Explain.
NOTE: Show all work in arriving at the solutions requested.
1. The Wall Street Journal reported the following spot and forward rates for the Swiss franc:
Spot……………………. $0.7876
30-day forward………… $0.7918
90-day forward………… $0.7968
180-day forward………. $0.8039
a. Was the Swiss franc selling at a discount or a premium in the forward market?
b. What was the 30-day forward premium (or discount)?
c. What was the 90-day forward premium (or discount)?
d. Suppose you executed a 90-day forward contract to exchange 100,000 Swiss francs into U.S. dollars. How many dollars would you get 90 days hence?
e. Assume a Swiss bank entered into a 180-day forward contract with Citicorp to buy $100,000. How many francs will the Swiss bank deliver in six months to get the U.S. dollars?
2. Explain the functions of the following agencies:
a. Overseas Private Investment Corporation (OPIC)
b. Export-Import Bank (Eximbank)
c. Foreign Credit Insurance Association (FCIA)
d. International Finance Corporation (IFC)
3. You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 2007, your firm’s Canadian subsidiary obtained a six-month loan of 100,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. $0.8180/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2007 contract
(Face value = $100,000 per contract) was quoted at U.S. $0.8120/Canadian dollar.
a. Explain how the Houston bank could lose on this transaction assuming no hedging.
b. If the bank does hedge with the forward contract, what is the maximum amount it can lose?
