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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

Bharat Pharma Ltd issues Foreign Currency Convertible Bonds of USD 2,000,000 at an exchange rate of Rs 80 per USD. The bonds carry a coupon of 5% p.a. payable in dollars. At the end of the year the rate is Rs 84 per USD. Taking the interest to be paid at year-end at the year-end rate, what is the rupee interest cost for the year?

The rupee interest cost is Rs 8,400,000. Dollar interest is 5% of USD 2,000,000, which is USD 100,000, and it is converted at the year-end rate of Rs 84. Using Rs 80 would wrongly give Rs 8,000,000.

  1. ARs 8,400,000Correct
  2. BRs 8,000,000
  3. CRs 160,000,000
  4. DRs 4,000,000

Explanation

Interest = 5% x USD 2,000,000 = USD 100,000. At the year-end rate of Rs 84 this is Rs 8,400,000. Using the issue rate of Rs 80 gives Rs 8,000,000, which ignores the stated payment rate. Rs 160,000,000 is the principal at issue rate.

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