Suppose an Event Occurs That Causes People to Gain Faith

question 62

Multiple Choice

Suppose an event occurs that causes people to gain faith in the ability of Europeans to pay their euro-denominated debt. Suppose that before this happens the exchange rate between the euro and the dollar is .75 euros/dollar. The resulting exchange rate would likely

• A)rise to (perhaps).9 euros/dollar.
• B)fall to (perhaps).6 euros/dollar.
• C)cause the exchange rate to have to be expressed in dollars per euro (because the other way would no longer make sense).
• D)remain unchanged.

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Definitions:

Bond Indenture

A legal contract between a bond issuer and a bondholder, detailing the terms of the bond such as the coupon rate, maturity date, and obligations of the issuer.

Call Provision

A clause in a bond or other fixed-income security that allows the issuer to repay the principal before the maturity date.

Sinking Fund

A savings fund into which an organization sets aside money over time, intended to pay off a debt or bond at its maturity or to meet a future capital expense.

Subordinated

A ranking of debt that places this type of debt lower than other debts in terms of claims on assets or earnings, typically in the context of bankruptcy or liquidation.