What is the percent cost to the firm of the loan

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Reference no: EM132064672

Suppose that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum. During the year U.S. inflation is 2.00% and Mexican inflation is 12.00%. The loan was taken when the spot rate was Peso 3.40/US$. At the end of the one year loan period the exchange rate was Peso 5.80/US$.

1. Based on the above information, what is the percent cost to the firm of the loan in Mexican pesos expressed as a per annum percentage?

2. Based on the information in Question 1, what is REAL percent cost of the loan to the firm in peso terms?

Reference no: EM132064672

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