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Assume that the Swiss franc has an annual interest rate of 8% and is expected to appreciate by 6%...

Question:

Assume that the Swiss franc has an annual interest rate of 8% and is expected to appreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:

A. 2%

B. 14.48%

C. 1.52%

D. 1.72%

Fixed interest rate

The fixed interest rate is the fixed percentage charged by the lender on the principal amount for the entire period of the loan.It is recorded in the profit and loss account. It is preferred by the borrower because it is not fluctuate due to market rate.

Answer and Explanation:

The correct option is C.1.52%

Calculating the effective financing rate:

{eq}\begin{align*} \rm\text{Effective financing rate }&= \left( 1 + \rm\text{Interest rate } \right) \times \left( 1 + \left( \rm\text{Expected interest rate } \right) \right) - 1\\ & = \left( 1 + 8\% \right) \times \left( 1 + \left( - 6\% \right) \right) - 1\\ &= 1.52\% \end{align*} {/eq}


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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