Question

In: Finance

If U.S. firms issue bonds in _______, the dollar outflows to cover fixed coupon payments increase...

If U.S. firms issue bonds in _______, the dollar outflows to cover fixed coupon payments increase as the dollar _______.

a foreign currency; weakens

dollars; strengthens

a foreign currency; strengthens

dollars; weakens

Solutions

Expert Solution

If US firms issue bonds in a foreign currency, the dollar outflows to cover fixed coupon payments increase as the dollar weakens .

If a US firm issues bonds in a foreign currency, the firm now has an exposure to the foreign currency. This is because it has to make payments in the foreign currency. Hence, if the dollar depreciates, all else equal, the company has to pay more dollars per foreign currency to pay the coupons denominated in foreign currency.

The second option is incorrect because if the bond is issued in dollars, it does not affect its coupon payments, as coupons are denominated in dollar, hence, fixed coupon payments remain the same.

The third option is incorrect because, if the dollar strengthens, the US-based company has to make a smaller coupon payment denominated in foreign exchange currency. This is because a dollar now fetches more foreign currency.

The fourth option is also wrong, because if the bond is issued in dollars, it does not affect its coupon payments, as coupons are denominated in dollar, hence, fixed coupon payments remain the same, irrespective of whether the dollar strengthens or weakens

jeff jeffy answered 7 months ago
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