Question

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Delos Debt Renegotiations​ (A). Delos borrowed euro80 milliontwo years ago. The loan​ agreement, an amortizing​...

Delos Debt Renegotiations (A). Delos borrowed euro80 million two years ago. The loan agreement, an amortizing loan, was for six years at 8.626% interest per annum. Delos has successfully completed two years of debt-service, but now wishes to renegotiate the terms of the loan with the lender to reduce its annual payments. a. What were Delos's annual principal and interest payments under the original loan agreement? b. After two years debt service, how much of the principal is still outstanding? c. If the loan were restructured to extend another two years, what would be the annual paymentslong dashprincipal and interest? Is this a significant reduction from the original agreement's annual payments?

Delos Debt Renegotiations (A). Delos borrowed

euro€8080

million two years ago. The loan agreement, an amortizing loan, was for six years at

8.6268.626%

interest per annum. Delos has successfully completed two years of debt-service, but now wishes to renegotiate the terms of the loan with the lender to reduce its annual payments.

a. What were Delos's annual principal and interest payments under the original loan agreement?

b. After two years debt service, how much of the principal is still outstanding?

c. If the loan were restructured to extend another two years, what would be the annual

paymentslong dash—principal

and interest? Is this a significant reduction from the original agreement's annual payments?

Solutions

Expert Solution

a) Annual Principal and Interest Payments (interest - 8.626%)

The following mathematical formula can also be used to calculate the loan payments and to construct an amortization schedule.

Instalment payment = PV x i x (1 + i) n /(1 + i) n - 1

where i = interest rate per payment period

n = number of payments

PV = principal amount of the loan

Once the instalment payment is calculated with the above formula, then the amount that goes toward interest and principal can be determined for each payment period. The amount that goes toward interest is the nominal interest rate times the balance at the beginning of the period. The rest of the payment (the payment minus the amount going toward interest) is payment of principal.

Amortization Schedule
$80.00 at 8.626% interest with 6 annual payments

Total Payments: $105.80

Total Interest: $25.80

Sl. No. Principal Amount Interest Payment Annual Payment Amount Balance Owned
1 10.74 6.90 17.64 69.26
2 11.67 5.97 17.64 57.59
3 12.67 4.97 17.64 44.92
4 13.77 3.87 17.64 31.15
5 14.95 2.69 17.64 16.20
6 16.20 1.40 17.61 0.00

b) Principal still​ outstanding after two year debt service

After two year debt-service the principal still outstanding can be calculated by reducing the sum of first and second year principal payments from euro €80.

Total Principal paid after 2 year debt service = euro 10.74 + euro 11.67

= euro 22.41

Outstanding Amount = euro 80 - euro 22.41

= euro 57.59

Thus. the principal outstanding still after two year service is euro 57.59

c) Annual payments after restucturing of the orginal loan agreement

As the loan agreement is resturucture to extend to further two years, the remaining period even after two year debt- service will be 6 years. i.e., remaning period = 2 = 4=2 = 6 years

The remaning principal amount outstanding = euro 57.59

Amortization Schedule

$57.59 at 8.626% interest with 6 annual payments
Total Payments: $76.17

Total Interest: $18.58

Sl. No. Principal Amount Interest Payment Annual Payment Amount Balance Owned
1 7.73 4.97 12.70 49.86
2 8.40 4.30 12.70 41.46
3 9.12 3.58 12.70 32.34
4 9.91 2.79 12.70 22.43
5 10.77 1.93 12.70 11.66
6 11.66 1.01 12.67 0.00

There is a significant change of euro 4.94 (euro 17.64 - euro 12.70) after the restucturing of thye orginal loan agreeement in which there was a two year loan extension.


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