9. Grupo Modelo, a brewery out of Mexico that exports such well-known varieties of beer including Corona, Modelo and Pacifico, is Mexican by incorporation. However, the company evaluates all business results, including financing costs, in U.S. dollars. The company needs to borrow $10,000,000 or the foreign currency equivalent for four years. For all issues, interest is payable once per year, at the end of the year. Available alternatives are:

Sell Japanese yen bonds at par yielding 3% per annum. The current exchange rate is 106/$, and the yen is expected to strengthen against the dollar by 2% per annum.

Sell euro-denominated bonds at par yielding 7% per annum. The current exchange rate is $1.1960/, and the euro is expected to weaken against the dollar by 2% per annum.

Sell U.S. dollar bonds at par yielding 5% per annum.

a. What is the expected effective interest rate per year (p.a.) for each loan?

b. Which one would you recommend and why?