Effective interest rate on foreign loan

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Reference no: EM1345905

Swenser Corporation arranged a two-year, $1,000,000 loan to fund the foreign project. The loan is denominated in Mexican Pesos, carries 10% nominal rate, and requires equal semi-annual payments. The exchange rate at the time of loan was 5.75 pesos per dollar but immediately dropped to 5.10 pesos per dollar before the first payment came due. The loan carried no exchange rate protection and was not hedged by Swenser in the foreign exchange market. Thus, Swenser 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 interest rate will Swenser end up paying on the foreign loan?

A) 10.36%
B) 17.44%
C) 21.79%
D) 11.50%
E) 20.00%

Reference no: EM1345905

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