A bank offers 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 borrowed today would require 102 ounces to be repaid in one year.) The risk-free interest rate is 9% per annum, and 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. Suppose that the price of gold is $1000 per ounce and the corporate client wants to borrow $1,000,000. 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. What is the correct rate of interest
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A bank offers a corporate client a choice between borrowing cash at 11% per annum and borrowing gold...
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