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Chapter 3: 9BP (page 249)

Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 14 percent against the euro. What is the effective interest rate on the loan for one year? (Consider the 14 percent fall in the value of the dollar as well as the interest payment.)

Short Answer

Expert verified

The effective interest rate is 23%.

Step by step solution

01

Information provided in the question

Loan term = 1 year

Borrowing interest rate = 9%

Fall in dollar value against euro = 14%

02

Calculation of effective interest rate on the loan

The effective interest rate is 23%.

Effectiverate=Interestrateonloan+Declineinvalueofdollar=9%+14%=23%

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