You work for a bank. Your bank was just contacted by a customer. The customer is a
Question:
You work for a bank. Your bank was just contacted by a customer. The customer is a gold-mining company. It wants to borrow money. But it wants to repay in gold instead of in cash. It offers to pay your bank 2,000 ounces of gold each year for 5 years, with the first payment starting one year from now. The current price of gold is $1,800 per ounce and the current risk-free rate is 3% p.a. for all terms. Suppose the storage cost for gold, expressed in percentage term, is 0.15% p.a. Suppose also that gold price is expected to increase at the rate of 4.50% p.a. How much money should your bank give to the customer now in exchange for the offered stream of gold payments, provided that your bank wants to make a profit of $200,000 (in today's dollars) on the loan?
Expert Answer:
To calculate the present value of the stream of gold payments we need to discount each payment back ... View the full answer
