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 euro. What was the bank's franc rate of return?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of euros the bank received at the time of the loan: 
1,000,000 CHF / 1.85 CHF per EUR = 540,540 EUR

At the maturity of the loan, the bank received back: 
540,540 EUR * 1.03 (3.75% interest) = 557,970.20 EUR

Then, the bank converted this amount of euros to francs: 
557,970.20 EUR * 1.98 CHF per EUR = 1,105,238.64 CHF

So, the bank made a profit of: 
1,105,238.64 CHF - 1,000,000 CHF = 105,238.64 CHF

The bank's franc rate of return is: 
105,238.64 CHF / 1,000,000 CHF = 10.52%

However, we need to adjust this return for the change in exchange rate: 
(1 + 10.52%) / (1 + (1.98 CHF per EUR / 1.85 CHF per EUR) - 1 = 11.04%

So the bank's franc rate of return was 11.04%, which is answer choice B.

A Swiss Bank Converted 1 Million Swiss Francs to Euros