Question

Which of the following are reasons why an MNC might issue bonds in a particular foreign market?

1) To take advantage of lower interest rates in the foreign market
2) To diversify its sources of funding
3) To tap into a larger pool of investors
4) To hedge against currency risk
5) To comply with local regulations

Answer 1

MNCs issue bonds in foreign markets to benefit from lower interest rates, diversify funding sources, access a larger investor pool, hedge against currency risk, and comply with local regulations.

Step-by-step explanation:

Multinational corporations (MNCs) might issue bonds in a particular foreign market for several reasons. Lower interest rates in the foreign market can reduce the cost of borrowing, making it financially appealing for MNCs to issue bonds there. Additionally, by entering a foreign bond market, MNCs can diversify their sources of funding, which may spread risk and improve the stability of their capital structure. Issuing bonds in different markets allows MNCs to tap into a larger pool of investors, potentially increasing the demand and amount of capital they can raise. Furthermore, if an MNC has expenses in a foreign currency, issuing bonds in that currency can serve as a hedge against currency risk, as the liabilities from the bond will also be in that currency. Lastly, MNCs may issue bonds in certain markets to comply with local regulations that can mandate a certain level of local financing for operating within the country.