A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when the exchange rate was 1.85 francs per euro. The borrower agreed to repay the principal plus 3.75 percent interest in one year. The borrower repaid euros at loan maturity and when the loan was repaid the exchange rate was 1.98 francs per dollar. What was the bank's franc rate of return?

Question

Quizplus · Accepted Answer

1 million Swiss francs were converted to euros when the exchange rate was 1.85 CHF/EUR.
Therefore, the bank received 1 million / 1.85 = 540,540.54 euros.
The borrower agreed to repay the principal plus 3.75% interest in one year, which amounts to 540,540.54 * 1.0375 = 561,212.16 euros.
When the loan was repaid, the exchange rate was 1.98 CHF/EUR.
Therefore, the bank received 561,212.16 * 1.98 = 1,110,966.35 CHF.
The bank's franc rate of return can be calculated as follows:
Return = (Ending value - Beginning value) / Beginning value
Return = (1,110,966.35 - 1,000,000) / 1,000,000
Return = 0.11096635 or 11.04%
Therefore, the answer is B.

A Swiss Bank Converted 1 Million Swiss Francs to Euros