A bank o ffers a corporate client a choice between borrowing cash at 11% per annum and borrowing
gold at 2% per annum. (If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces bor-
rowed today would require 102 ounces to be repaid in one year.) The risk-free interest rate is 9.25%
per annum, and storage costs are 0.5% per annum. Discuss whether the rate of interest on the gold
loan is too high or too low in relation to the rate of interest on the cash loan. 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
I am having trouble getting started.
Any hints?
gold at 2% per annum. (If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces bor-
rowed today would require 102 ounces to be repaid in one year.) The risk-free interest rate is 9.25%
per annum, and storage costs are 0.5% per annum. Discuss whether the rate of interest on the gold
loan is too high or too low in relation to the rate of interest on the cash loan. 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
I am having trouble getting started.
Any hints?