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Effective interest rate on the foreign loan

Swenser Corporation arranged a two-year, $1,000,000 loan to fund a foreign project. The loan is denominated in Mexican Pesos, carries a 10% nominal rate, and requires equal semi-annual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar but immediately dropped to 5.10 pesos per dollar before the first payment came due. The loan carried no exchange rate protection and was not hedged by Swenser in the foreign exchange market. Thus, Swenser must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Swenser end up paying on the foreign loan?

A) 10.36%
B) 17.44%
C) 21.79%
D) 11.50%
E) 20.00%

Please show all work in an Excel file. Thanks.

Solution Preview

Swenser Corpporation arranged a two-year, $1,000,000 loan to fund a foreign project.  The loan is denominated in Mexican Pesos, carries a 10% nominal rate, and requires equal semi-annual payments.  The exchange rate at the time of the loan was 5.75 pesos per dollar but immediately fropped to 5.10 pesos per dollar before the first payment came due.  The loan carried no exchange rate protection and was not hedged by Swenser in the foreign exchange market.  Thus, Swenser must convert U.S. funds ...

Solution Summary

The solution calculates the effective interest rate on the foreign loan denominated in Mexican Pesos.

$2.19