A US Bank Converted $1 Million to Swiss Francs to Make

question 7

Multiple Choice

A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return?

• A) 26.00%
• B) -2.69%
• C) 7.14%
• D) -3.08%
• E) 5.00% {[($1 million x SFr 1.2 x 1.05)/SFr 1.3/$]/$1 million} - 1

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Definitions:

Equity

The ownership interest in a company of its shareholders; it represents the amount of assets that would be returned to shareholders if all the company's debts were paid off.

Debt Ratio

A financial ratio that compares the amount of a company’s total debt to its total assets, indicating the leverage level.

Assets

Resources owned by a company or individual considered valuable and can be used to produce positive economic value.

Equity

The residual interest in the assets of a company after deducting liabilities, representing the ownership interest of shareholders.