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CMA Intermediate · Financial Management and Business Data Analytics · Sources of Finance

Sagar Textiles Ltd issues rupee-denominated bonds of Rs 50 crore in an overseas market. The bonds carry a coupon of 8% p.a. The rupee depreciates by 3% against the investor's currency over the year. Who bears the exchange rate risk on these bonds?

The overseas investor bears the exchange rate risk. Because the bonds are rupee-denominated, the issuer repays in rupees and faces no currency mismatch, while the investor's return falls when the rupee depreciates against the investor's currency.

  1. AThe issuing company, because it must repay in foreign currency
  2. BThe overseas investor, because the bond is denominated in rupeesCorrect
  3. CBoth bear it equally under the terms of issue
  4. DNeither, because coupon is fixed at 8%

Explanation

Masala bonds are denominated in rupees, so the issuer pays interest and principal in rupees and has no currency mismatch. The investor receives rupees and converts them, so a depreciating rupee reduces the investor's return. Option A is wrong because repayment is not in foreign currency.

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