Solution: 12/(100 - 20) = 15%.
35. What is the effective interest rate on a $10,000 loan at 12 percent interest rate if the bank requires a 20-percent compensating balance and an advance payment of the interest?
A. 12.55%
B. 13.55%
C. 15.65%
D. 16.65%
* E. 17.65%
Solution: 12/(100 - 20 - 12) = 17.65%.
36. A US company borrows Swiss francs for one year at 8 percent. The Swiss franc is expected to depreciate by 6 percent against the dollar for one year. What is the effective interest rate of the loan in US dollar terms?
A. 1.00%
* B. 1.52%
C. 2.00%
D. 2.50%
E. 3.11%
Solution: Use Equation (14-1).
r = [(1 + 0.08)(1 + (-0.06) - 1] = 1.52%.
37. A US company borrows British pounds for one year at 6 percent. The US one-year interest rate is 8 percent. The one-year forward rate of the pound is $1.93. The spot rate of the pound at the beginning is $1.95. The pound's spot rate is $2.05 by the end of the year. Based on the information, compute the percentage change in pound and the effective interest rate of the loan in US dollar terms.
A. 5.1%, 10.0%
B. 6.1%, 11.4%
* C. 5.1%, 11.4%
D. 7.0%, 12.0%
E. 8.0%, 12.5%
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