Question

Chavez S.A., a Venezuelan company, wishes to borrow $8,000,000 for eight weeks (maturity). A rate of 6.250% per year is quoted by potential lenders in Great Britain, and Switzerland. British, and the Swiss-Euro bond definitions of interest (day count conventions) are 56 days and 60 days, respectively. Numbers of days in a financial year are 360. From which source should Chavez borrow?

Answer 1

Chavez should borrow from the British market.

Step-by-step explanation:

We need to compare the interest payment of both markets to make the decision

First, calculate the Interest payment in case, if borrowed from the British market

Interest Payment ( British ) = Principal Value x Interest rate x Time fraction

Interest Payment ( British ) = $8,000,000 x 6.250% x 56/360

Interest Payment ( British ) = $77,777.78

First, calculate the Interest payment in case if borrowed from Swiss market

Interest Payment ( Swiss ) = Principal Value x Interest rate x Time fraction

Interest Payment ( Swiss ) = $8,000,000 x 6.250% x 60/360

Interest Payment ( Swiss ) = $83,333.33

As the British market offers a lower rate, Chavez should borrow from the British market.