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

Bharat Polymers Ltd issued FCCBs of USD 1,000,000 when the rate was Rs 70 per USD. The bonds were not converted and were redeemed at maturity at par when the rate was Rs 82 per USD. Ignoring interest, what is the additional rupee outgo on redemption compared with the rupee value at issue, and why does it arise?

Redemption costs USD 1,000,000 x 82 = Rs 8.20 crore against Rs 7 crore at issue, an extra outgo of Rs 1.20 crore. It arises because the rupee depreciated, so each dollar of the liability needs more rupees to settle.

  1. ARs 1.20 crore, because the rupee depreciated against the dollarCorrect
  2. BRs 1.20 crore saving, because the rupee depreciated
  3. CRs 12 crore, because the principal doubled
  4. DRs 0.12 crore, because the rupee appreciated

Explanation

Rupee value at issue = 1,000,000 x 70 = Rs 7 crore. At redemption = 1,000,000 x 82 = Rs 8.20 crore. Difference = Rs 1.20 crore extra, caused by rupee depreciation, since more rupees are needed per dollar. It is a cost, not a saving, and the principal did not double.

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