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FIN 621 (10)

international financial management-Lecture5

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FIN 621
Sergiy Rakhmayil

• International Finance IBS 621 • Lecture 5 • World Financial Markets and Institutions • International Banking and Money Market • International Bond Market • International Equity Markets • Futures and Options on Foreign Exchange • Currency and Interest Rate Swaps • International Portfolio Investment • International Bond Market • Facts and figures • Foreign bonds and Eurobonds • Types of debt securities • Credit ratings • Market structure • International Bond Market Indices • The World’s Bond Markets • Astatistical perspective: – Go to the Bank of International Settlements and view data on outstanding issues of debt and equity securities. – In 2005, outstanding amounts of international debt securities was $14,615.9 billion, domestic debt securities B$44,991.7 billion. Data from Morgan Stanley Capital International show that world market capitalization (World Index) was $1,257.78 billion in the end of 2005. – The total market value of the world’s bond markets is _____________than that of the world equity markets • Foreign bonds and Eurobonds • Foreign bond – denominated in local currency but issued by _____________entity. – Toyota issues $-denominated bonds in the US market • Eurobond – denominated in currency __________from the currency where it is issued – KLM Royal Dutch issues a US$-denominated bond in the UK • Types: – Bearer bonds – Registered bonds • National Security Regulations • Yankee bonds must meet the requirements of the __________, just like U.S. domestic bonds. • Many borrowers find this level of regulation burdensome and prefer to raise U.S. dollars in the Eurobond market. • Eurobonds sold in the primary market in the United States may not be sold to U.S. citizens. • Of course, a U.S. citizen could buy a Eurobond on the _______________market. • Global Bonds • Aglobal bond is a very large international bond offering by a __________borrower that is simultaneously sold in NorthAmerica, Europe and Asia. • Mostly institutional investors are the purchasers so far. • Types of Instruments • Straight Fixed Rate Debt • Euro-medium term notes • Floating-Rate Notes • Equity-Related Bonds • Zero Coupon Bonds • Dual-Currency Bonds • Straight Fixed Rate Debt • Calculate the value of a 10-year 10% semi-annual coupon bond when yield to maturity for this type of bonds is r d13% • Floating-Rate Notes • A FRN has the following coupon formula: 6-month LIBOR rate + ____ basis points with a cap of ____ and a floor of ____. The coupon rate is reset every 6 month. Compute the coupon rates. • Equity-Related Bonds • Convertibles – Convertible bonds allow the holder to surrender his bond ________________for a specified number of shares in the firm of the issuer. • Bonds with equity warrants – These bonds allow the holder to keep his bond but still __________a specified number of shares in the firm of the issuer at a specified price. • Value = Price of straight bond + Value of call option to convert into stock or to buy shares • Trade usually at premium compared to straight bonds • Note: V callable bondice of straight bond - V call option • Implied Forward Exchange Rate • Term structure of interest rates exists for every major currency – View term structures for USA, Japan, Germany, other countries from Bloomberg. – Using yields on zero-coupon bonds with different maturities, we can calculate implied forward __________________rates – Useful information in checking exchange rate forecasts (break-even analysis in international bond investing) – n-year implied forward rate is F =S(1nr ) /(1FC ) DC n • Implied Forward Exchange Rate • Dual-Currency Bonds • Astraight fixed-rate bond, with – interest paid in one currency, and – principal in another currency. • Japanese firms have been big issuers with coupons in yen and principal in dollars. • Good option for a MNC financing a foreign subsidiary. – Issuer: borrow money in __________currency but at a _________cost than directly issuing a straight bond in that currency – Investor: receive a ____________yield than they can get by investing in a __________bond in the coupon currency. • Dual-Currency Bonds • AJapanese firm issues an ____ Dual Currency Yen/U.S. Dollar bond maturing in 10 years. Issue amount: JPY ________________. Redemption amount at maturity: US$_______________. Current spot rate JPY/USD=_____________. The yen yield curve is flat at ____% and $ yield curve is flat at ____%. What is the value of this bond? • Dual-Currency Bonds • Credit risk and credit ratings • Bonds with higher default rates pay higher yields • Credit risk includes – Default risk • Default  return less than promised, often zero
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