Question
The SCB bank offers a corporate client a choice between borrowing either cash at 11% per annum or borrowing gold at 2% per annum. (If
The SCB bank offers a corporate client a choice between borrowing either cash at 11% per annum or borrowing gold at 2% per annum. (If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces gold borrowed today would require 102 ounces to be repaid in one year). The risk-free interest rate is 9.25% per annum, and gold storage costs are 0.5% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expressed with continuous compounding. Discuss whether the corporate client should borrow gold loan or cash loan?
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