A country has $50 million of debt at the rate of 10%. It does not make any payments in year 1 and manages to renegotiate the interest rate to 5% at the end of year 1. The interest payment in year 2 for this country would be:
A) $57.75 million.
B) $7.75 million.
C) $5 million.
D) $2.75 million.

Question

Quizplus · Accepted Answer

At the end of year 1, the debt grows to $55 million due to the 10% interest. In year 2, with the renegotiated 5% interest rate, the interest payment is 5% of $55 million, which is $2.75 million.

A Country Has $50 Million of Debt at the Rate