Sovereign Debt Negotiations. The Greek government is considering a €150 million loan for a four-year maturity.

It will be an amortizing loan, meaning that the interest and principal payments in total, annually, to a constant amount over the maturity of the loan. There is, however, a debate over the appropriate interest rate. The Greek government believes the appropriate rate for its current credit standing in the market today is 2.269%, but given the Greek government’s historical fiscal issues, several international banks with which it is negotiating are arguing that it is most likely 3.75%, and at the minimum 3.45%. What impact do these different interest rates have on the prospective annual payments?

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Loan Payments 1 2 3 Principal 150 Interest (3.40) (2.58) (1.74) (0.88) Interest 0.2269 Principal (36.25) (37.07) (37.91) (38.77) Maturity (years) 4.0 Total (39.65) (39.65) (39.65) (39.65)