Answer:
17.67%
Explanation:
Solution
Given that:
The Loan amount in USD = $1,000,000
The Loan is denominated in Mexican pesos.
The rate of exchange at the time of loan = 5.75 pesos per USD
Thus,
The Loan amount in Mexican pesos = 1000000 * 5.75 = 5,750,000 Mexican pesos
The Loan carries interest rate = 6.5%
Now,
The Loan duration = 2 years = 4 semiannual periods
The Loan to be repaid in Mexican pesos in 4 equal semiannual installments
So,
To get semiannual installments we will apply PMT function of excel:
Which is,
PMT (rate, nper, pv, fv, type) = PMT(6.5%/2, 4, -5750000, 0, 0)
= 1556164.09 Mexican pesos
Thus,
The exchange rate dropped to 5.10 pesos per USD before the first semiannual payment is due and stays so till the end of loan period.
Then,
The Semiannual installment in USD = 1556164.09 / 5.10 = $305,130.2137
To get nominal semiannual rate (for USD amounts) we will use RATE function of excel:
The RATE(nper, pmt, pv, fv, type)
= RATE (4, 305130.2137, -1000000, 0,0)
= 8.477%
Effective annual rate = (1 + 8.477%) 2 - 1 = 17.67%
Therefore, the effective annual interest rate will Blenman end up paying on the loan is 17.67%
