Blenman Corporation, based in the United States, arranged a 2-year, $1,000,000 l
ID: 2670974 • Letter: B
Question
Blenman Corporation, based in the United States, arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 11.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Blenman must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective annual interest rate will Blenman end up paying on the loan?a)23.91%
b)22.76%
c)20.46%
d)21.84%
e)22.99%
Explanation / Answer
Blenman Corporation, based in the United States, arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 11.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Blenman must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective annual interest rate will Blenman end up paying on the loan?
a)23.91%
b)22.76%
c)20.46%
d)21.84%
e)22.99%
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