Answered step by step
Verified Expert Solution
Question
1 Approved Answer
(30 points) 4. First National Bank of Memphis issued $100 million of one-year CDs in the United States at a rate of 2.50 percent. It
(30 points) 4. First National Bank of Memphis issued $100 million of one-year CDs in the United States at a rate of 2.50 percent. It invested $50 million in one-year loans to U.S. corporations at an annual rate of 45 percent. The remaining $50 million was loaned, with one-year maturity, to a corporation in Chile yielding 6 percent on Chilean Peso (CLP). All proceeds of loans, both U.S. and Chile, will be received at the end of the year. The exchange rate at the time the Chilean loans were made was $0.0011900/Chilean Peso (CLP) or CLP 840.336/$. a What will be the net return (Return on Loan interest minus cost of funds for the $100 million of one-year CDs) if the exchange rate between the Chilean Peso and the U.S. dollar remains the same? (This is calculated for you.) Cost of funds = 0.025 x $100 million = $2,500,000 Return on U.S. loan 0.045 x $50 million = $2,250,000 Return on Chilean Loan =.06XCLP42,016.8millionx$0.0011900/CLP = S 3,000,000 Total interest earned = $2,750,000 Net return on investment = $2,750,000/$100 million = 2.75 percent b. What will be the net return on this $100 million investment if the exchange rate changes to CLP 900.000/$? Cost of funds 111 Return on U.S. loan = Return on Chilean Loan = Total interest earned Net return on investment = $ percent
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started