Question
Assume that 10-year zero coupon Indian rupee debt is sold by the Indian government to domestic investors at a yield APY of 10% per annum.
Assume that 10-year zero coupon Indian rupee debt is sold by the Indian government to
domestic investors at a yield APY of 10% per annum. Suppose that World Bank, a AAA
rated entity world-wide with no default risk, wishes to issue rupee debt of the same maturity
on the same date. World Bank can sell matching maturity dollar debt at yield of 4% per
annum. The rupee trades on the issue date at INR 60 = 1$. An investor wishing to buy or sell
rupees 10-year forward will pay INR 107.45 = $1, which is equivalent to an annual currency
depreciation rate of 6% per annum.
Assume that investors are rational and that taxation is symmetric in the sense that all
investors in debt are subject to a single tax rate that cannot be avoided or evaded (That is, this
question is not about taxes).
1.Assuming perfect markets of the sort in the MM theorems, discuss why World Bank
rupee debt should be priced to yield 10% per annum.
2.Assume that investors abroad are willing to buy World Bank rupee debt at a yield of
8% per annum. Discuss what imperfections canlet World Bank issue cheap debt.
3. Politicians argue that Let World Bank borrow at 8% and on-
lend the money to the Indian government at 8.25%. This lowers the countrys cost of
capital.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started