For specificity, consider a fresh loan of $A which matures in period T. Scheduled repayments are S1, S2, … ST. Consider the specific example of an IDA (International Development Association) loan, where, typically T = 40 and
We consider schemes which substitute a revised payment schedule R1, R2, … RT which have the same value to the creditor but which are easier for the debtor to pay. The constant value constraint implies
where F = 1 is the discount factor and H = 40 is a sufficiently long horizon10. The schemes we consider therefore operate by advancing and postponing debt service payments.
10 We need to allow for the possibility that postponed payments late in the life of a loan might force extension of the loan maturity.
By Prof. Christopher L. Gilbert, Prof. Alexandra Tabova
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