International Finance and Banking: J.P. Morgan Mexican Debt Case Study

This case study analyzes J.P. Morgan's debt-bond exchange program for Mexican loans in 1988, examining its context within the international debt crisis. The assignment addresses several key questions, including the implications of external debt for less developed countries, the financial products developed by J.P. Morgan (such as debt bond swaps and issues), and the features of bank debt bond swaps. It also explores principal collateral and protective covenants, the bidding process, and relevant U.S. Treasury and swap rates. The solution includes calculations and analysis of financial metrics, such as coupon payments, LIBOR, and the ratio of bank debt to bonds, providing a comprehensive overview of the financial instruments and strategies involved. The case study highlights the innovative approach of J.P. Morgan in addressing the debt crisis and the factors that influenced the success of the debt-bond exchange.

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QUESTION ONE
The debt borrowed from outside the country with least developed countries is not a threat
to the international financial system. Its negative implications on development achievement of
many of these less developed countries is severe. It’s difficult to bring these countries to after
reviewing their major elements of the current international debt strategy comparing to their
adequacy in bringing these countries back to sustainable debt problems and growth (Frieden,
2015).
QUESTION TWO
The products J.P Morgan developed are, (Neal, 2015):
Debt bond exchange, bond swap, bond issue and other debt instrument.
Description of features of the bank debt bond swap and its expiation of the logic behind the
design of the product.
A bank debt is a bank debt instrument which include government bond, certificate of deposit,
corporate bond and municipal bond.
A bond swap is a process of selling the bond and using the sales to purchase another bond. This
will help to achieve specific objective.
QUESTION THREE
Description of the principal collateral and other protective covenants.
Principal collateral is the sum of the principal amounts on deposit in the collection account.
It is also the amount on deposit on interest collection account and trust account.
It is also the principal total balance of the portfolio including the amount not funded and the
amount funded on any funding loan delayed or revolving loan.
Therefore principal collateral = (principal proceeds of such date) – (The aggregate principal
balance of the ineligible investments as of such date)
QUESTION FOUR
Bidding is a competitive offer given to a certain set price tag by the business or an
individual for product(s) or service(s) or even a demand that something to be done. Bidding is
done to determine the price of doing a certain job or supplying goods and services to an
organization or an individual. Bidding is competitive in the sense that more than one person
gives a quotation to determine the cost of supplying goods of services in the organization or
individual person. In bedding there should be an expert limit given early to be used to mark the

bidder’s quotations and help to determine the winner who has quoted as the marking scheme or
even near the professional’s estimates. The bidders exercise their willingness to pay and the
much they are willing to pay (Bodea & Hicks, 2015).
QUESTION FIVE
U.S Treasury and swap rates for this case shows:
The 20-year treasury trips which yielded 8.790%.
The ordinary treasury rates were 8.29% for 10 years.
The ordinary treasury rates were 8.48% for 30 years.
Interpolated yields were 8.32% for 14 years.
Treasuries were 8.39% for 20 years
Swap quotes floating for Mexican loans were at 85basis point over treasury 14years
Swap quotes fixed for Mexican loans were at 85basis point over treasury 20 years.
The LIBOR stood at 7.5%
QUESTION SIX
(Workings in excel sheet for a, b, c and d)
a) 20year treasury strip collateral
20years semi-annually *2 =40 times
8.790% coupon
Treasury bond $24
0.08790/2 *$24 = $1.0548
For the whole period of 20years
20 *$1.0548 =$21.096
The investor will pay
($8/$24) *$1.0548 =$0.3516 *40 =$14.064 billions
b) LOBOR + 1.625% for 20years
(7.5% +1.625%) = 9.125%
$24 *0.09125 *20 = $43.8 billions
c) 50% coupon annuity

8.790% *50% =4.790%
4.790/100 =.04790 *$24 =$1.1496
For the 20years
$1.1496*20 =$22.992 billions
d) Ratio of bank debt to bonds;
Market current values the bank debt at 50% * $78 billion = $39 billions
Coupon 8.790% /2 =4.790%
LIBOR =7.5% +4.790% = 12.29%
$39 *12.29% = $4.7931 billions
For the 20 years period
$4.7931 *20 = $95.862 billions
Ratio of debt to bond
95.862 : 78
95.862 +78 = 178.862
95.862/173.862 :78/173.862
55 : 45
References
Frieden, J. (2015). Banking on the world: the politics of American international finance.
Routledge.
Bodea, C., & Hicks, R. (2015). International finance and central bank independence: Institutional
diffusion and the flow and cost of capital. The Journal of Politics, 77(1), 268-284.
Neal, L. (2015). A concise history of international finance: From Babylon to Bernanke.
Cambridge University Press.