0.701-Final Exam, Autumn Quarter 2017.18 Page 6 of 12 Please show all of your wo
ID: 2787057 • Letter: 0
Question
0.701-Final Exam, Autumn Quarter 2017.18 Page 6 of 12 Please show all of your work. Partial credit will be evaluated and awarded if appropriate. Assume hypothetically (for this question only) that the blended interest rate and terms of borrowing the necessary funds denominated in USD and Country B were identical. Assume that the only difference between the two alternatives was the made. If the Company's speculative projection of the exchange rate trend between USD and Country B currencies came true: currency in which the payments must be A. What would be the consequences of the expected currency shift on ABC Co. if they had selected the USD-denominated debt facility? B. What would be the consequences of the expected currency shift on ABC Co. if they had selected the Country B-denominated debt facility?Explanation / Answer
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US dollar denominated debt facility:
Blended Interest rate in US$ and another country currency:
For a loan amount, if the
interest rate is a
blended interest rate, then it is a combination of existing rate and the newly introduced rate
This is to repace an existing loan - refinancing is applied and an interest rate of bigger than the old rate but smaller than the existing market rate. This way we can calculate the pooled cost of dunds;
The blended rate would be the weighted average rate of the existing 2 rates;
A. Hence when they select the US$ denominated debt facility, then the expected currency shift would reflect the amount of rise or fall in the US$ value
B.
When they select the Other currency denominated debt facility, then the expected currency shift would reflect the amount of rise or fall in that currency value
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