Chapter 15 - International long-term financing and investment. In this chapter, the learning objectives are: To describe international bank loan financing, to demonstrate how the currency denominating a bond issue is chosen, to describe the primary and secondary international equity markets,…
Chapter 15 International Long-Term Financing and Investment Objectives • To describe international bank loan financing • To demonstrate how the currency denominating a bond issue is chosen • To describe the primary and secondary international equity markets • To outline other means of international long-term financing Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa (cont ) 15-2 Objectives (cont.) • To explain how choice is made between domestic and foreign securities as investment outlets • To consider the effect of taxation on the choice between domestic and foreign portfolio investments • To illustrate the effect of international portfolio diversification Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-3 International bank loans • Foreign loans: raised by borrowers who are foreign to the country where the loans are raised • Euroloans: loans denominated in a currency other than the currency of the country where the loans are raised Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-4 Syndicated loans • Syndicated loans (Euro or foreign) are so large that it becomes necessary to form a syndicate or a group of lending banks to finance the loans The interest charged is a reference rate plus a spread Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-5 The spread • The interest paid on syndicated loans is usually calculated by adding a spread to the London interbank offer rate (LIBOR) or another reference rate such as the US prime rate or the Singapore interbank offer rate (SIBOR) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-6 Determinants of the spread • • • • Availability of funds Creditworthiness of borrowers Maturity Fees Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-7 Eurobonds • Eurobonds are placed (sold) in countries other than the country in whose currency the issue is denominated Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-8 Foreign bonds • Foreign bonds are issued by borrowers who are foreign to the country where the bonds are placed • The bonds are denominated in the country’s currency Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-9 Nicknames of foreign bonds • • • • Yankee bonds Samurai bonds Bulldogs Matilda bonds (United States) (Japan) (United Kingdom) (Australia) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-10 Share prices (U.K.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-36 The rate of return A S R ( R) A d ( A) a (S ) ( A, S ) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-37 Combining domestic and foreign securities E(R p ) wR w R σ2 ( R p ) w2σ2 ( R ) w 2σ2 ( R ) ww σ( R )σ( R )ρ( R, R ) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A Moosa Slides prepared by Afaf Moosa 15-38 The effect of correlation =1