International Finance in Order to Term Paper

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S. dollars will still be cheapest. If we sign a forward today we will lock in a rate of 6% if we need to refinance; if we wait that rate could be higher in a year's time. Thus, the forward rate today locks in today's expected rate for that time period.

The forward contract would be for two years, to deliver sufficient USD to pay for the loan in two years' time. The amount would be $604 million USD, given 6% interest in the second year.

Task 3. There are a number of types of bonds that could be issued by Development Unlimited. These include straight fixed debt, zero coupon bonds and floating rate notes. Straight fixed debt is also known as plain vanilla bonds. These come with a fixed rate of interest on the debt. They are typically bearer bonds as well. The company will simply pay a coupon interest rate for the set period and then at the end of the period will repay the principle as well.

The second type is a zero coupon bond. For this type of bond, the return is taken as a discount on the price of the bond. There are no periodic interest payments. The zero coupon bond is riskier for the purchaser because the cash flows are entirely at the end of the period.

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The advantage of the zero coupon is that it is simple, and can be used for short time frames. The disadvantage of a zero coupon is the greater risk to the buyer over long time frames. The issuer would need to compensate for this.

The third type is the floating rate note. This type of bond is where the rate paid on the bond fluctuates with the prevailing market interest rates. These bonds are more attractive in secondary markets and the usefulness of floating rate notes for the company depends on where the company thinks interest rates are going. If the company feels rates are going to decline, it would issue a floating rate note; if it feels rates are going to rise, it would not issue a floating rate note.

For this one-year debt, it is recommended that Development Unlimited issue a zero coupon bond. With a one-year time frame, there is no need to pay interest every six months, as this will create needless paperwork and complexity. The rate paid will be nearly the same as what is paid on a plain vanilla bond over the….....

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