Question

A sovereign borrower is considering a 100 million loan for a 4​-year maturity. It will be...

A sovereign borrower is considering a 100 million loan for a 4​-year maturity. It will be an amortizing​ loan, meaning that the interest and principal payments will​ total, annually, to a constant amount over the maturity of the loan. There​ is, however, a debate over the appropriate interest rate. The borrower believes the appropriate rate for its current credit standing in the market today is 8​%, but a number of international banks with which it is negotiating are arguing that is most likely 12​%, at the minimum 8​%.

What impact do these different interest rates have on the prospective annual​ payments?

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Answer #1

1. Annual Payment if Interest Rate is 8% = Loan Amount / PVAF ( 0.08,4)

Annual Payment if Interest Rate is 8% = 100 Million / 3.3121

Annual Payment if Interest Rate is 8% = $30.19 Million

2. Annual Payment if Interest Rate is 12% = Loan Amount / PVAF ( 0.12,4)

Annual Payment if Interest Rate is 12% = 100 Million / 3.3121

Annual Payment if Interest Rate is 12% = $32.92 Million

Thus We can infer that increase in interest rate will increase annual payment of the same amortizing loan.

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