New Hampshire Corp. has decided to issue three-year bonds denominated in 5 million Russian rubles at par. The bonds have a coupon rate of 17 percent. If the ruble is expected to appreciate from its current level of $.03 to $.032, $.034, and $.035 in years 1, 2, and 3, respectively, what is the financing cost of these bonds?

Question

Quizplus · Accepted Answer

The financing cost of the bonds includes both the coupon payments and the effect of currency appreciation on the repayment amount. The ruble's appreciation increases the dollar cost of the bond repayments, leading to a higher effective financing cost than the nominal coupon rate of 17 percent. Calculating the exact financing cost requires considering the coupon payments in rubles, converting them into dollars at the expected exchange rates, and then finding the internal rate of return (IRR) of these cash flows. The correct answer, given the appreciation rates, is 23.39 percent, which accounts for both the interest payments and the increased repayment cost due to the ruble's appreciation.