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You are borrowing USD 1000 for one year, at a coupon rate of 8.2%. You will get the money today, and will repay all principal and interest one year from today. If the current CAD per USD spot rate is 0.93, the CAD inflation rate is 2.5%, and the USD inflation rate is 3.3%, what is the CAD cost of debt for this loan?

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ebrightosagie

Answer: $1131.7 CAD

Explanation:

Current spot rate 1 CAD( Canadian dollar) = 0.98 USD( USA dollar)

CAD inflation rate = 2.5%

USD inflation rate = 3.3% Number of years (n)= 1

P = $1000 USD

R = 8.2%

converting the $1000 USD to CAD

= $1000/0.98 = $1020.41 CAD.

I = p × r × t / 100

I = 1020.41 × 8.2 × 1 / 100

I = $83.674 CAD

Repayment = $1104.084

Cost of loan in CAD if inflation rate is 2.5℅

= $1104.084 × 0.025

= $27.6021

Total debt on Loan

= $1131.7 CAD

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