The Cost of Repaying Loans for Bronxland in a Different Exchange Rate
Calculating the Cost of Repaying Loans in Bronxland
In this scenario, Bronxland is planning to issue bonds in US dollars worth $1 billion. The current exchange rate between the dollar and the Bronxland currency is 1 Bronx equals $1.35. However, suppose the exchange rate changes so that 1 Bronx equals $1.25. How much will it cost Bronxland to repay this loan?
Cost of repaying loan = Loan amount in Bronxland currency * New exchange rate = $1.25 billion * $1.25 = $1.5625 billion
Here are the steps on how to calculate the cost of repaying the loan:
- Calculate the amount of Bronxland currency that the loan is worth in the current exchange rate.
- Calculate the amount of Bronxland currency that the loan is worth in the new exchange rate.
- Calculate the cost of repaying the loan in the new exchange rate.
Loan amount in Bronxland currency = $1 billion * 1.35
Loan amount in Bronxland currency = $1.35 billion
Loan amount in Bronxland currency = $1 billion * 1.25
Loan amount in Bronxland currency = $1.25 billion
Cost of repaying loan = Loan amount in Bronxland currency * New exchange rate
Cost of repaying loan = $1.25 billion * $1.25
Cost of repaying loan = $1.5625 billion
Therefore, the cost of repaying the loan in the new exchange rate is $1.5625 billion.
Here is a summary of the calculations:
| Step | Calculation | Result |
|---|---|---|
| 1 | Calculate the amount of Bronxland currency that the loan is worth in the current exchange rate. | Loan amount in Bronxland currency = $1 billion * 1.35 = $1.35 billion |
| 2 | Calculate the amount of Bronxland currency that the loan is worth in the new exchange rate. | Loan amount in Bronxland currency = $1 billion * 1.25 = $1.25 billion |
| 3 | Calculate the cost of repaying the loan in the new exchange rate. | Cost of repaying loan = Loan amount in Bronxland currency * New exchange rate = $1.25 billion * $1.25 = $1.5625 billion |