SUGGESTED SOLUTIONS TO CHAPTER 13 PROBLEMS
1. Suppose that the current 180-day interbank Eurodollar rate is 9 percent (all rates are stated on an annualized
basis). If next period's rate is 9.5 percent, what will a Eurocurrency loan priced at LIBOR plus 1 percent cost?
ANSWER. Eurodollar loans are made on a floating rate basis, with the rate set at a fixed margin over LIBOR. Thus, if
next period's annualized LIBOR is 13%, then the Eurocurrency loan will be at 14% (13% + 1%) on an annualized
basis.
2.
Citibank offers to syndicate a Eurodollar credit for the government of Poland with the following terms:
Principal
Maturity
Interest rate
Syndication fee
a.
US$1,000,000,000
7 years
LIBOR + 1.5%, reset every six months
1.75%
What are the net proceeds to Poland from this syndicated loan?
ANSWER. Poland will receive $982,500,000, which equals the $1 billion less the 1.75% syndication fee.
b. Assuming that six-month LIBOR is currently at 6.35 percent, what is the effective annual interest cost to Poland
for the first six months of this loan?
ANSWER. At 6-month LIBOR + 1.5%, Poland will pay interest at an annual rate of 7.85% (6.35% + 1.5%).
3. IBM needs to raise $1 billion and is trying to decide between a domestic dollar bond issue and a Eurobond
issue. The U.S. bond can be issued at a coupon of 6.75 percent, paid semiannually, with underwriting and other
expenses totaling 0.95 percent of the issue size. The Eurobond would cost only 0.55 percent to issue but would bear
an annual coupon of 6.88 percent. Both issues would mature in 10 years.
a.
Assuming all else is equal, which is the least expensive issue for IBM?
ANSWER. The least expensive issue can be found by comparing the yield to maturity (YTM) for each bond,
computed as the internal rate of return or IRR. For the domestic bond issue, the YTM is the solution r to the
following equation:
20
$33,750,000 $1,000,000,000
$990,500,000 = 
+
(1 + r )t
(1 + r )20
t=1
where the $990,500,000 in bond proceeds equals the billion dollar issue less 0.95% in issuance costs. The solution
turns out to be r = 3.44%. Since this is a semiannual yield, we must convert it to annualized basis. The annualized
YTM is found as (1.0344)2 - 1, or 7.00%.
For the Eurobond issue, the YTM is the solution k to the following equation:
10
$68,800,000 $1,000,000,000
$994,500,000 = 
+
(1 + r )t
(1 + r )10
t=1
The solution to this equation turns out to be k = 6.96%. Since this YTM is less than the annualized YTM for the U.S.
bond, the Eurobond is the less expensive bond to issue.
b.
What other factors might IBM want to consider before deciding which bond to issue?
ANSWER. IBM might like to consider whether by issuing a Eurobond it can increase its investment presence among
a different class of investor. It should also take into account the terms of the call and other provisions. Moreover, if
it has any thoughts of revising the terms of the bond issue in the future, it should consider the greater difficulty it
would have with the Eurobond issue (because buyers are largely anonymous).
4. Daewoo Motors has been told it could issue $150 million face value in Euro-CP at a discount rate of 8.9 percent
based on a 360-day year.
a.
If the maturity of Daewoo's Euro-CP is 91 days, what will be its proceeds from the issue?
ANSWER. Giving the discount pricing conventions for Euronotes and Euro-CP, the market price of an issue is
calculated using Equation 13.4 from the text:
Market price = Face value x [1 - ( Discount rate x
n
)]
360
The application of Equation 13.4 would yield a market price of $146,625,417 for the Daewoo issue:
Market price = $150,000,000 x [1 - ( 0.089 x
b.
91
)] = $146,625,417
360
What will be its annual yield on this issue?
ANSWER. The annual yield can be computed using Equation 13.6:
Annual yield = Discount rate x
Annual yield = 8.9% x
Face value
Market price
$150,000,000
= 9.10%
$146,625,417
In the case of the Daewoo issue, the annual yield would be 9.10%:
5. Commerzbank in seeking to invest $100 million short term. It has the choice between buying Euro-CP yielding
6.34 percent annually and a U.S. bank deposit yielding 6.36 percent annually, both maturing in 150 days. The EuroCP yield is calculated on a 360-day year, whereas the U.S. bank-deposit yield is calculated on a 365-day year.
a.
How much Euro-CP in terms of face value can Commerzbank's $100 million buy?
ANSWER. We can reverse Equation 13.7 to solve for the face value of Euro-CP that $100 million can buy:
Face value = Market value x(1 + Annual yield x
= $100,000,000 x(1 + 0.0634 x
b.
n
)
360
150
) = $102,641,667
360
Assuming that all else is equal, which is Commerzbank's preferred investment? Explain.
ANSWER. The Euro-CP will earn 6.34% x 150/360 or 2.64% for the 150-day period. The 150-day yield on the U.S.
bank deposit is 6.36% x 150/365, or 2.61%. Other things being equal, the higher yield on the Euro-CP will
dominate.
c.
What would be the annual yield on the U.S. bank deposit if it were quoted on a 360-day year?
ANSWER. To convert a yield from one based on a 365-day year to one based on a 360-day year, we must multiply it
by 360/365. Thus, the yield on the U.S. bank deposit quoted on a 360-day year equals 6.27% (6.36% x 360/365).
d.
What would be the annual Euro-CP yield if it were quoted on a 365-day year?
ANSWER. To convert the Euro-CP yield to one based on a 365-day year, we must multiply it by 365/360. Doing so
generates a quoted yield based on a 365-day year of 6.43% (6.34% x 365/360). Based on the answers to parts c and
d, we can see that when quoted on an apples-to-apples basis, the annualized yield on the Euro-CP exceeds the
annualized yield on the U.S. bank deposit.