Question

A company took a loan of ₹10,00,000 at 12% p.a. and offered ₹15,00,000 in 8% Debentures as collateral security. Calculate the finance cost for the year.

Hint:

Collateral debentures:

No interest expense unless invoked
Finance cost = interest on actual borrowing only

Answer 1

Concept: When debentures are issued as collateral security:

No interest is paid on collateral debentures unless they are enforced.
Finance cost includes only interest on the actual loan.

Step 1: Interest on loan. Loan amount: \[ ₹10{,}00{,}000 \] Rate: \[ 12% \] \[ \text{Interest} = 10{,}00{,}000 \times 12% = ₹1{,}20{,}000 \]
Step 2: Debentures issued as collateral.

₹15,00,000 debentures are only a security.
No interest is paid unless default occurs.
Hence, ignore 8% debenture interest.
Final Answer: \[ \boxed{\text{Finance Cost} = ₹1{,}20{,}000} \]