Ch012 International Bond Market.doc

Eun & Resnick 4eCHAPTER 12 International Bond MarketThe Worlds Bond Markets: A Statistical PerspectiveForeign Bonds and EurobondsBearer Bonds and Registered BondsNational Security RegulationsWithholding TaxesOther Recent Regulatory ChangesGlobal BondsTypes of InstrumentsStraight Fixed-Rate IssuesEuro-Medium-Term NotesFloating-Rate NotesEquity-Related BondsZero-Coupon BondsDual-Currency BondsCurrency Distribution, Nationality, and Type of IssuerInternational Bond Market Credit RatingsInternational Finance in Practice: Heineken Refreshes Euromarket with Spectacular Unrated BondsEurobond Market Structure and PracticesPrimary MarketSecondary MarketClearing ProceduresInternational Bond Market IndexesSummaryMINI CASE: Sara Lee Corporations EurobondsThe Worlds Bond Markets: A Statistical Perspective1 In any given year, what percent of new international bonds are likely to be Eurobonds rather than foreign bondsa) 80%b) 45%c) 25%d) 15%Answer: a)Foreign Bonds and Eurobonds2 A “foreign bond” issue is a) one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currencyb) one offered by a foreign borrower to investors in a national market and denominated in that nations currencyc) for example, a German MNC issuing dollar-denominated bonds to U.S. investorsd) b) and c)Answer: d)3 A “Eurobond” issue isa) one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currencyb) usually a bearer bondc) for example a Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlandsd) All of the aboveAnswer: d)4 In any given year, rightly 80 percent of new international bonds are likely to bea) Eurobondsb) Foreign currency bondsc) Domestic bondsd) None of the aboveAnswer: a)5 “Yankee” bonds are a) dollar-denominated foreign bonds originally sold to U.S. investorsb) yen-denominated foreign bonds originally sold in Japanc) pound sterling-denominated foreign bonds originally sold in the U.K.d) none of the above.Answer: a)6 “Samurai” bonds are a) dollar-denominated foreign bonds originally sold to U.S. investorsb) yen-denominated foreign bonds originally sold in Japanc) pound sterling-denominated foreign bonds originally sold in the U.K.d) none of the above.Answer: b)7 “Bulldog” bonds are a) dollar-denominated foreign bonds originally sold to U.S. investorsb) yen-denominated foreign bonds originally sold in Japanc) pound sterling-denominated foreign bonds originally sold in the U.K.d) none of the above.Answer: c)Bearer Bonds and Registered Bonds8 A “bearer bond” is one thata) shows the owners name on the bondb) the owners name is recorded by the issuerc) possession is evidence of ownershipd) a) and b)Answer: c)9 A “registered bond” is one thata) shows the owners name on the bondb) the owners name is recorded by the issuerc) the owners name is assigned to a bond serial number recorded by the issuerd) both a) and b), or c)Answer: d)10 U.S. security regulations require Yankee bonds and U.S. corporate bonds sold to U.S. citizens to bea) Municipal bondsb) registered bondsc) bearer bondsd) none of the aboveAnswer: b)National Security Regulations11 Publicly traded Yankee bonds musta) Meet the same regulations as U.S. domestic bondsb) Meet the same regulations as Eurobonds if sold to Europeansc) Meet the same regulations as Samurai bonds if sold to Japanesed) None of the aboveAnswer: a)12 The Eurobond segment of the international bond market:a) Is roughly four times the size of the foreign bond segment.b) Has considerably less regulatory hurdles than the foreign bond segment.c) Typically has a lower rate of interest that borrowers pay in comparison to Yankee bond financing.d) All of the aboveAnswer: d)Withholding Taxes13 U.S. corporations a) Are allowed to issue bearer bonds to non-U.S. citizensb) Are not allowed to issue bearer bondsc) Are allowed to issue treasury bonds but not T-billsd) None of the aboveAnswer: a)Other Recent Regulatory Changes14 Shelf registrationa) Allows a set of bookshelves to remain level.b) Allows an issuer to preregister a securities issue, and then “shelve” the securities for later sale.c) Allows an investment bank to increase the fees they charge by charging for storage of the “shelved” securitiesd) Eliminates the information disclosure that many foreign firms found objectionable in the foreign bond market.Answer: b)15 Rule 144Aa) Allows qualified institution investors in the United States to trade private placements. b) Was designed to make the U.S. capital market more competitive with the Eurobond market.c) Primarily, but not exclusively, impacts Yankee bonds.d) All of the above.Answer: d)Global Bonds16 A “global bond” issuea) is a very large international bond offering by several borrowers pooled togetherb) is a very large international bond offering by a single borrower that is simultaneously sold in several national bond marketsc) has higher yields for the purchasersd) has a lower liquidity Answer: b)17 A global bond issue denominated in U.S. dollars and issued by U.S. corporationsa) Trade as Eurobonds overseasb) Trade as domestic bonds in the U.S. domestic marketc) Both a) and b)d) None of the aboveAnswer: c)18 Global bond issuesa) Can save U.S. issuers 15 basis points relative to domestic bonds, all else equalb) Tend to have increased liquidity relative to Eurobonds or domestic bondsc) Have been partially facilitated by rule 144Ad) All of the aboveAnswer: d)Types of Instruments19 In terms of the types of instruments offered,a) The Yankee bond market has been more innovative than the international bond marketb) The international bond market has been much more innovative than the U.S. market.c) The most innovations have come from Milan, just like any other fashiond) None of the aboveAnswer: b)Straight Fixed-Rate Issues20 Find the present value of a 10-year Treasury bond that pays a semi-annual coupon, has a coupon rate of 6%, a yield to maturity of 5%, a par value of $1,000 when the yield to maturity is 5%.a) $1,018.81b) $1,231.15c) $699.07d) none of the aboveAnswer: a)Rationale: if your students have financial calculators and have had a previous finance class, this is easy: with the calculator set to two payments per year, N = 4; I/Y = 5%; PMT = $30; FV = $1,000; calculate PV = $1,018.81If not, then:. The book does not explicitly cover bond pricing; however many professors review bond pricing in this chapter. Use your judgment.21 The vast majority of new international bond offeringsa) Are straight fixed-rate notesb) Are callable and convertiblec) Are convertible adjustable rated) Are adjustable rate, with interest rate caps and collars.Answer: a)22 The vast majority of new international bond offeringsa) Make annual coupon paymentsb) Have fixed coupon paymentsc) Have a fixed maturityd) All of the aboveAnswer: d)Euro-Medium-Term Notes23 Euro-medium term notesa) Are typically fixed-rate corporate notes issued with maturities ranging from less than a year to about ten years.b) Are typically fixed-rate corporate notes issued with maturities ranging from three years to about ten years.c) Are sold just like bonds in the primary marketd) None of the aboveAnswer: a)Floating-Rate Notes24 Find the yield to maturity for this floating rate note: The reset date is today; coupons are paid annually according to the formula (LIBOR + percent); since issuance, there has not been a change in the issuers credit rating. The bond has ten years to maturity and LIBOR = 3.5 percent.a) 3.5%b) 4%c) 3.75%d) There is not enough information provided to make a determination.Answer: d)25 Floating-rate notes (FRN) a) experience very volatile price changes between reset datesb) are typically medium-term bonds with coupon payments indexed to some reference rate (e.g. LIBOR)c) appeal to investors with strong need to preserve the principal value of the investment should they need to liquidate prior to the maturity of the bondsd) b) and c)Answer: d) 26 On a reset date, floating-rate notes a) experience very volatile price changes b) market price will usually gravitate toward parc) market price will usually gravitate toward par, unless the borrowers credit rating has declinedd) b) and c)Answer: d) 27 Floating-rate notes a) Are a form of adjustable rate bondb) Have contractually specified coupon payments, therefore they are fixed rate bondsc) Always trade at par valued) a) and c)Answer: a) 28 A five-year Floating-rate note (FRN) has coupons referenced to six-month dollar LIBOR, and pays coupon interest semiannually. Assume that the current six-month LIBOR is 6 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next periods coupon rate on a $1,000 face value FRN will be:a) $29.375b) $30.000c) $30.625d) $61.250Answer: c)Rationale: .5 (LIBOR + risk premium percent) $1,000 = .5 (.06 + .00125) $1,000 = $30.62529 A ten-year Floating-rate note (FRN) has coupons referenced to six-month pound LIBOR, and pays coupon interest quarterly. Assume that the current six-month LIBOR is 3 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next periods coupon rate on a 1,000 face value FRN will be:a) 31.25b) 15.625c) 30.625d) 7.8125Answer: d)Rationale: (LIBOR + risk premium percent) par value= .25 (.03 + .00125) 1,000 = 7.8125Equity-Related Bonds30 The floor value of a convertible bond:a) Is the “straight bond” value.b) Is the conversion value.c) Is the minimum of a) and b)d) Is the maximum of a) and b)Answer: d)31 There are two types of equity related bonds:a) Convertible bonds and dual currency bonds b) Convertible bonds and kitchen sink bondsc) Convertible bonds and bonds with equity warrantsd) Callable bonds and exchangeable bondsAnswer: c)32 Bonds with equity warrantsa) Are really the same as convertible bonds if the prestated price of exercising the warrant is the par value of the bond.b) Can be viewed as straight debt with a call option (technically a warrant) attached.c) Can only be exercised on coupon datesd) Typically are convertible as wellAnswer: b)33 A convertible bond pays interest annually at a coupon rate of 5% on a par value of $1,000. The bond has 10 years maturity remaining and the discount rate on other-wise identical non-convertible debt is 6.5%. The bond is convertible into shares of common stock at a conversion price of $25 per share (i.e. the bond is exchangeable for 40 shares). Todays closing stock price was $20. What is the least that this bond will sell for?a) $800.00b) $892.17c) $1,250d) None of the aboveAnswer: b)Rationale: At todays stock price the bond is worth $800 converted into 40 shares of stock. The straight bond value = $892.17: N=10; I/YR =6.5; PV= 892.17; PMT= $50; FV = 1,000.If your students know bond pricing from an earlier finance class this is a good questionbut not if they dont have financial calculators. Some students will get hung up on “whats the least that the bond should sell for?” Ask them about their carif its worth $5,000 as a running car and $25 as scrap, what is the least amount of money that they would accept?34 A convertible bond pays interest annually at a coupon rate of 5% on a par value of $1,000. The bond has 10 years maturity remaining and the discount rate on other-wise identical non-convertible debt is 5%. The bond is convertible into shares of common stock at a conversion price of $25 per share (i.e. the bond is exchangeable for 40 shares). Todays closing stock price was $31.25. What is the least that this bond will sell for?a) $800.00b) $1,000c) $1,250d) None of the aboveAnswer: c)Rationale: your students should know that the straight bond value is $1,000 since the coupon rate equals the yield to maturity. At todays stock price the bond is worth $1,250 converted into 40 shares of stock. Some students will get hung up on “whats the least that the bond should sell for?” Ask them about their carif its worth $5,000 as a running car and $25 as a pile of scrap metal, what is the least amount of money that they would accept?Zero-Coupon Bonds35 Find the price of a 30-year zero coupon bond with a 1,000 par value that has a yield to maturity of i = 5 percent.a) 231.38b) 432.20c) 4,321.94d) none of the aboveAnswer: a)Rationale: 36 U.S. citizens must pay tax on the imputed interest represented by the fact that zero coupon bonds price gets a bit closer to par value as each year goes by. If you have a 25-year zero coupon bond with $1,000 par value, how much imputed interest will you record in the coming year if interest rates stay the same at ten percent?a) $92.30b) $9.23c) $0d) none of the aboveAnswer: b)Rationale:37 Zero-coupon bonds issued in 2006 are due in 2016. If they are sold at 55 percent of face value, the implied yield to maturity at issuance isa) 1.062%b) 6.16%c) 8.31%d) cannot be determined, need more informationAnswer: b) Rationale: FV = PV (1 + i)t i = (FV/PV)1/t 1 i = (1/.55)1/10 1 = 1.0616 1 = 0.0616 = 6.16%38 Zero coupon bondsa) Pay interest at zero percentb) Are sold at a discount from par valuec) Are attractive to Japanese investors who are not required to pay taxes on capital gainsd) a) and b)Answer: d)Dual-Currency Bonds39 Find the value of a three-year dual currency bond with annual coupons (paid in U.S. dollars at a 5 percent coupon rate) that pays 500 per $1,000 par value at maturity. The cash flows of the bond are:Year 0Year 1Year 2Year 3 0$50.00 $50.00$50 + 500The dollar-based yield to maturity is i$ = 3%; the spot exchange rate is $1.80 = 1.00; expected inflation over the next three years is p $ = 2% in the U.S. and p = 3% in the U.K.a) $924.04b) $941.30c) $965.06d) $599.00Answer: b)Rationale: The forward rate is $1.7481/1.00: $1.80 (1.02)3 = 1.00 (1.03)3Thus our cash flows in dollars are:Year 0Year 1Year 2Year 3 0$50.00 $50.00$924.04 = $50 + 500$1.7481/1.00Finding the NPV of these cash flows at i$ = 3% gives a bond price of $941.30.This is a hard question in that it demands that students learn something in previous chapters and courses.40 The implicit SF/$ exchange rate at maturity of a Swiss franc/U.S. dollar dual currency bonds that pay $581.40 at maturity per SF1,000, isa) SF0.58/$1.00b) SF1.58/$1.00c) SF1.72/$1.00d) SF1.95/$1.00Answer: c) Rationale: SF1,000/$581.40 = SF1.72/$1.0041 Consider a British poundU.S. dollar dual currency bonds that pay 581.40 at maturity per $1,000 of par value. If at maturity, the exchange rate is $1.90 = 1.00a) You should insist on getting paid in dollarsb) Investors holding this bond are better off for the exchange rate.c) The issuer of the bond is worse off for the exchange rate.d) Both b) and c)Answer: d)42 The implicit $/ exchange rate at maturity of a British poundU.S. dollar dual currency bonds that pay 581.40 at maturity per $1,000 of par value is:a) $1.95/1.00b) $1.72/1.00c) $1.58/1.00d) $0.5814/1.00Answer: b) Rationale: $1,000/581.40 = $1.72/1.00Currency Distribution, Nationality, and Type of IssuerInternational Bond Market Credit Ratings43 “Investment grade” ratings are in the following categories:a) Moodys: AAA to BBB - S&Ps: Aaa to Baab) Moodys: Aaa to Baa - S&Ps: AAA to BBBc) Moodys: AAA to A - S&Ps: Aaa to Ad) Moodys: Aaa to A - S&Ps: AAA to AAnswer: b)44 Investors in corporate bonds would still be interested in sovereign credit ratingsa) Because the sovereign credit rating usually represents a ceiling on corporate credit ratings within that country.b) Because they might play the TED spread.c) Because they are the rating assigned by the count