Montreal Investment Group, a Canadian investment partnership, borrows USD 10,000,000 for two years at a time when
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Question:
Montreal Investment Group, a Canadian investment partnership, borrows USD 10,000,000 for two years at a time when the exchange rate is CAD1.3083/USD. The interest rate on the loan is 8% per annum. At the end of the first year, the borrower will make the first interest payment in U.S. dollars. At the end of the second year, the borrower will repay the principal and also make the second interest payment both in U.S. dollars. The U.S. dollar is expected to appreciate against the Canadian dollar at 3% per annum each year of the loan. What is the effective cost of this loan for the borrower?
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