term loan interest based on initial principal amount
Assuming a company is granted a term loan with a L+425 bps (LIBOR Floor 1.25%). Besides paying interest, it also plans to reduce the principal whenever excess funds are available. Will interest payments then be calculated in reference to the initial principal amount or to the one that is left after partial principal repayments?
The WSO guide describes the latter, however, the models I've seen so far hold interest payments constant at the initial level. Is that just a simplicfication?
Interests should be payed on the principal outstanding so a decrease in principal should lead to a decrease in the interest due (otherwise why does the borrower would use excess funds to anticipate the loan reimbursement?!).
It should be just a simplification or, alternatively, an assumption according to which it is not expected a cash surplus and hence a premature repayment.
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