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Sovereign Debt Negotiations

Finance

Sovereign Debt Negotiations. 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 pnncipal 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 9% but a number of international banks with which it is negotiating are arguing that is most likely 14%, at the minimum 9% What impact do these different interest rates have on the prospective annual payments? The annual payment, if the interest rate was 9%, iss (Round to the nearest dollar) m m m DO

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If the Interest rate is 9% , let the annual payment be $A million

So, Present value of 4 annual payments = $100 million

A/1.09+A/1.09^2+A/1.09^3+A/1.09^4 = 100

A/0.09*(1-1/1.09^4) = 100

A =30.86686621

So, Annual payment is $30.86686621 million or $30,866,866

If the Interest rate is 14% , let the annual payment be $A million

So, Present value of 4 annual payments = $100 million

A/1.14+A/1.14^2+A/1.14^3+A/1.14^4 = 100

A/0.14*(1-1/1.14^4) = 100

A =34.32047833

So, Annual payment is $34.32047833million or $34,320,478

So, the interest rate of 14% will increase the annual payment by $3,453,612 in comparison to 9%

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