Denim Industries can borrow its needed financing for expansion using one of two

Question

Denim Industries can borrow its needed financing for expansion using one of two foreign lending facilities. It can borrow at a nominal interest rate of 9% in Mexican pesos or at 4% in Canadian dollars. If the peso is expected to depreciate by 9.86% and the Canadian dollar is expected to appreciate by 3%, which loan has the lower effective annual interest rate?

The effective annual interest rate of the loan in Mexican pesos is _____ %(Round to two decimal places)

The effective annual interest rate of the loan in Canadian dollars is _____%(Round to two decimal places)

Explanation / Answer

Canadian dollar loan has a lower effective annual Interest rate.

The effective annual interest rate of the loan in Mexican pesos is = 9% * (1 + 0.0986) = 9.89%

The effective annual interest rate of the loan in Canadian dollars is = 4% * (1 - 0.03) = 3.88%

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