Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6 percent. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

Question

Quizplus · Accepted Answer

The effective financing rate is calculated by considering both the interest paid and the change in exchange rate. The interest paid is 6% of 2,000,000 yen, which is 120,000 yen. The total repayment in yen is 2,120,000 yen. Initially, 2,000,000 yen was equivalent to $10,000 (2,000,000 * 0.005). At maturity, 2,120,000 yen is equivalent to $7,420 (2,120,000 * 0.0035). The effective financing rate is (($7,420 - $10,000) / $10,000) * 100 = -25.8%.

Morton Company Obtains a One-Year Loan of 2,000,000 Japanese Yen