Gold Loan
Not what you're looking for?
A bank offers a corporate client a choice between borrowing cash at 11% per annum and borrowing gold at 2% per annum. (If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces borrowed today would require 102 ounces to be repaid in one years time.) The risk-free interest rate is 9.25% per annum and storage costs are 0.5% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expresses with continuous compounding. Discuss whether the rate of interest on the gold loan is too high or too low in relation to the rate of interest on the cash loan.
Purchase this Solution
Solution Summary
The solution calculates and compares the rate of interest on cash loan and gold loan.
Solution Preview
If $100 cash is borrowed the amount that has to be returned at the end of year 1=$100*(1+11%) = $111
Cost of borrowing cash=$111-$100=$11
If someone borrows gold he will convert it to cash and use it. At the end of year 1 he will buy gold from the market and return it to the bank.
Price of gold will depend on the risk free rate and the ...
Purchase this Solution
Free BrainMass Quizzes
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.