Question

Delos Debt Renegotiations​ (A). Delos borrowed euro€80 million two years ago. The loan​ agreement, an amortizing​ loan, was for six years at 8.622​% 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?

Answer 1

Delos borrowed amount= €80 million

Interest rate on loan = 8.622%

a). Calculating the annual payments of loan:

Annual Payment = P*r* (1+r)" (1+r) - 1

where, P = Loan amount =  €80 million

r = periodic interest rate = 0.08622

n = no of years = 6

(1 +0.08622) Annual Payment = 80million * 0.08622 * - (1 + 0.08622)6 – 1

1.64250526 Annual Payment = 6897600 * 1,64250526-1

Annual Payments =  € 17,633,076.31

Now, Calculating the Delos's annual principal and Interest payment under the original loan​ agreement by providing the amortization table:

Year	Opening bal.	Payment	Interest amount	Principal Amount	Closing Bal.
1	80,000,000.00	17,633,076.31	6,897,600.00	10,735,476.31	69,264,523.69
2	69,264,523.69	17,633,076.31	5,971,987.23	11,661,089.08	57,603,434.61
3	57,603,434.61	17,633,076.31	4,966,568.13	12,666,508.18	44,936,926.43
4	44,936,926.43	17,633,076.31	3,874,461.80	13,758,614.51	31,178,311.92
5	31,178,311.92	17,633,076.31	2,688,194.05	14,944,882.26	16,233,429.67
6	16,233,429.67	17,633,076.31	1,399,646.31	16,233,430.00	(0.34)

b). After two years debt​ service, how much of the principal is still​ outstanding as per the above amortization table

= € 57,603,434.61

c). As the loan is restructured with amount € 57,603,434.61 for another additional 2 years making 6 years loan tenure (4 of original + 2 additional).

Calculating the annual payments of the loan:

Annual Payment = P*r* (1+r)" (1+r) - 1

where, P = Loan amount =  € 57,603,434.61

r = periodic interest rate = 0.08622

n = no of years = 6

(1 + 0.08622) Annual Payment = 57, 603, 434.61 * 0.08622* (1 + 0.08622)6 – 1

1.64250526 Annual Payment = 4966, 568.13 * 1.64250526 - 1

Annual Payments = € 12,696,571.98

Now, Calculating the Delos's annual principal and Interest payment under the revised loan​ agreement by providing the amortization table:

Year	Opening bal.	Payment	Interest amount	Principal Amount	Closing Bal.
1	57,603,434.61	12,696,571.98	4,966,568.13	7,730,003.85	49,873,430.76
2	49,873,430.76	12,696,571.98	4,300,087.20	8,396,484.78	41,476,945.98
3	41,476,945.98	12,696,571.98	3,576,142.28	9,120,429.70	32,356,516.28
4	32,356,516.28	12,696,571.98	2,789,778.83	9,906,793.15	22,449,723.14
5	22,449,723.14	12,696,571.98	1,935,615.13	10,760,956.85	11,688,766.29
6	11,688,766.29	12,696,571.98	1,007,805.43	11,688,766.55	(0.26)

Interest amount = Opening balance*Monthly Interest rate

Principal amount = Payment - Interest amount

Closing balance = Opening Balance + Interest - Payment

- So, significant reduction from the original​ agreement's annual​ payments = € 17,633,076.31 - € 12,696,571.98

= € 4,936,504.33