7. Negotiating the Rate. 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 creditstanding in the market today is 10%, but a number of the international banks with which it is negotiating are arguing that it is most likely 12%, at the minimum 11%. What impact do these different interest rates have on the prospective annual payments?
7. Negotiating the Rate. 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 creditstanding in the market today is 10%, but a number of the international banks with which it is negotiating are arguing that it is most likely 12%, at the minimum 11%. What impact do these different interest rates have on the prospective annual payments?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 creditstanding in the market today is 10%, but a number of international banks with which it is negotiating are arguing that it is most likely 12%, at the minimum 11%. What impact do these different interest rates have on the prospective annual payments?
Loan Payments 1 2 3 4
Principal $100 Interest (10.00) (7.85) (5.48) (2.87)
Interest rate .10 Principal (21.55) (23.70) (26.07) (28.68)
Maturity (years) 4.0 Total (31.55) (31.55) (31.55) (31.55)
Transcribed Image Text:7. Negotiating the Rate. 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 creditstanding in the
market today is 10%, but a number of the international banks with which it is negotiating are arguing that it is most likely 12%, at
the minimum 11%. What impact do these different interest rates have on the prospective annual payments?
Problem 7.
Loan
Principal
Interest rate
Maturity (years)
$100
0.10
4.0
Payments
Interest
Principal
Total
1
(10.00)
(21.55)
(31.55)
2
(7.85)
(23.70)
(31.55)
(5.48)
(26.07)
(31.55)
4
(2.87)
(28.68)
(31.55)
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