Haidong, a Taiwanese contract manufacturer, has experienced an upsurge in busine

Question

Haidong, a Taiwanese contract manufacturer, has experienced an upsurge in business. High- cost Japanese electronics firms have been outsourcing manufacturing lately, and Haidong has landed some big contracts in recent months. To support its working capital needs, Haidong seeks bank financing of Taiwanese dollar (TWD) 200 million for 180 days. Through its Japanese associates, Haidong is in contact with two Japanese banks offering JPY loans to Asian firms at competitive rates. The two quotes are summarized in the following table.

Bank Stated Rate Interest Convention Compensating Balance

Mizuho 3.5% actual/ 360 simple 10%

Shinsei 3.6% Annual compounding 8%

Assume spot TWDJPY equals 3.87.Calculate the effective annual rate for Mizuho Bank. Format x.xx%

Explanation / Answer

Effective annual rate = Stated rate / (1- compensating balance)

                                         = 0.035 / (1-0.10)

                                         = 0.035 / 0.90

                                         = 3.89%

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