Question

A sovereign borrower is considering a $100 million loan for a 44​-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 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?

Answer 1

we calculate the annual payments using PMT function in Excel with these inputs :

rate = appropriate rate of interest per period

nper = number of periods in loan

pv = beginning loan amount

fv = ending loan amount (in case of a fully repaid loan, this would be zero)

For a 9% loan :

annual payment =PMT(9%,44,100000000)

rate = 9%

nper = 44

pv = 100 million

PMT is calculated to be $9,207,675

This is the annual payment for a 9% loan

For a 9% loan :

annual payment =PMT(9%,44,100000000)

rate = 9%

nper = 44

pv = 100 million

PMT is calculated to be $9,207,675

This is the annual payment for a 9% loan

For a 9% loan :

annual payment =PMT(9%,44,100000000)

rate = 9%

nper = 44

pv = 100 million

PMT is calculated to be $9,207,675

This is the annual payment for a 9% loan

For a 14% loan :

annual payment =PMT(14%,44,100000000)

rate = 14%

nper = 44

pv = 100 million

PMT is calculated to be $14,044,023

This is the annual payment for a 14% loan