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Question regarding the cost of borrowing in cash

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A bank offers a corporate client a choice between borrowing cash at 11 % per annum and borrowing gold at 1 % per annum (If gold is borrowed, interest must be repaid in gold). Suppose that the risk-free interest rate is 9 % per annum, and storage costs are 0.48 % per annum, the spot price of gold is $ 1,200 per ounce and the corporate client wants to borrow $ 991,162 for 4 years. Calculate the difference between cost of borrowing in cash and cost of borrowing in gold (in dollar amount). Note in calculating the difference, deduct the cost of borrowing in gold from the cost of borrowing in cash. All rates are quoted in continuously compounding. Round your final answer to 2 decimal places only.

Reference no: EM131117768

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