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?

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Loan Payments 1 2 3 4 Principal $100 Interest (10.00) Interest rate 0.10 Maturity (years) 4.0 (5.48) (2.87) Principal (21.55) (23.70) (26.07) (28.68) Total (31.55) (31.55) (31.55) (31.55) (7.85)