Question

Corporate Debt

1.Think of Corporate debt as a financial instrument in international markets, how are investment flows affected, how does this affect fx?

2.What is LIBOR?

3.How does Fed policy affect LIBOR (use fx market – price mechanism, BOP to explain).

Answer 1

Answer(1): Corporate debt can be raised by two methods:

1. By issuing fixed income securities, i.e. commercial papers, bonds
2. By taking loan from banks.

If corporate debt increases, interest also increases, companies have to pay heavy interest out of the profits, because paying interest is an obligation. Interest is a burden that decreases the net profit, when company pays interest out of the profits, profit available for shareholders comes down and earning per share comes down, shareholders do not invest in that company further. So investment flow decreases.

If companies have heavy corporate debt, it will be a burden on Government, If there is no plan of reducing the debt, it will affect the currency of the country. Heavy debt may lead the currency devaluation.

Answer(2) LIBOR- It is the London inter bank offer rate is the benchmark or average rate that is used to calculate interest rate on various loans. LIBOR is based on these currencies-

1. U.S. Dollar
2. Euro
3. Swiss Franc
4. Pound sterling
5. Japanese Yen

There are total 35 different LIBOR rates each business day. It is administered by Intercontinental Exchange (ICE).

Answer(3): FED policy affects the LIBOR rate, if the policy in the favour of the key currencies, i.e. Dollar, Euro, Yen, GBP and Swiss franc then it will have a positive impact on LIBOR, otherwise there will be negative impact.