Paying interest on the net foreign debt

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Reference no: EM131172296

Suppose that the U.S. net foreign debt (liabilities less assets) is equal to 25 per cent of the country’s GNP and that foreign assets and liabilities pay an interest rate of 5 per cent per year. (a) What would be the “debt burden” for the U.S. (i.e. interest on debt as a percentage of GNP) from paying interest on the net foreign debt? Do you think this is a “large” number? (b) What is the net foreign debt were 100 per cent of GNP? (c) Using the tools you learned in FIN 402, write out the formula that describes next year’s debt burden, given the interest rate r, the growth rate of the economy g, and the net stock of debt (as percent of GNP) = d. Comment on result.

Reference no: EM131172296

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