The Hua Xia Corporation, a Chinese mineral extraction firm, wishes to make a Eurobond issue

Face Value=$150 million

OfferPrice=$150+(150×101100)=$301.5millionOfferPrice=$150+(150×101100)=$301.5million

Coupon=FaceValue+(FaceValue+CouponRate)=$150+(150×4.5100)=$156.75millionCoupon=FaceValue+(FaceValue+CouponRate)=$150+(150×4.5100)=$156.75million

YTM is the cost of debt for bonds. So, in this case we have to find the YTM.

YieldtoMaturity=Coupon+FaceValue−OfferPriceYearsFaceValue+OfferPrice2=$156.75+$150−$301.515$150+$301.52=64.96%YieldtoMaturity=Coupon+FaceValue−OfferPriceYearsFaceValue+OfferPrice2=$156.75+$150−$301.515$150+$301.52=64.96%

The YTM or yield to maturity for the bond is quite high, as the offer price is more than 100% more than the par value or face value in this case.

If USD depreciates then,

NewCoupon=OldCoupon+(OldCoupon×DepriciationRate)=$156.75+(156.75×0.03)=$161.45millionNewCoupon=OldCoupon+(OldCoupon×DepriciationRate)=$156.75+(156.75×0.03)=$161.45million

The par or face value of the bond would not change because this is the price at which the bond was issued at the beginning. Therefore, it would remain the same.

Face Value=$150 million

NewOfferPrice=OldOfferPrice+(OldOfferPrice×DepriciationRate)=$301.5+(301.5×0.03)=$310.55NewOfferPrice=OldOfferPrice+(OldOfferPrice×DepriciationRate)=$301.5+(301.5×0.03)=$310.55

NewYTM=Coupon+FaceValue−OfferPriceYearsFaceValue+OfferPrice2=$161.45+$150−$310.5515$150+$310.552=74.76%NewYTM=Coupon+FaceValue−OfferPriceYearsFaceValue+OfferPrice2=$161.45+$150−$310.5515$150+$310.552=74.76%

The cost of debt has increased significantly as we can see. This is because although the offer price and the coupon rate increased, it was not possible for the company to increase the par value of the bond as it is fixed at the time of issuing the bond. As the cost of debt is YTM and its expressed in percentage points, it would be the same for Chinese yuan as calculated in dollars. Therefore, in CNY the cost of debt after the depreciation is 74.76%.