Question
1. A bank currently with a 4-year $10 million non-amortizing loan paying 7% interest rate is in negotiations to reschedule its payment terms. The new
1. A bank currently with a 4-year $10 million non-amortizing loan paying 7% interest rate is in negotiations to reschedule its payment terms. The new terms will extend the loan to eat years and require interest payments of 2% for the first four years and 8% for the last four years. The full principal of $10 million will be paid at the end of year 8. An upfront fee of 1% will be charged in year 0. If we assume the cost of funds for the banks is 3% before rescheduling and 4% after rescheduling, is the bank better off with the new terms? Explain and show work.
2. Continuing with problem 1, what should the cost of funds after rescheduling for the present value of the new loan to be the same as the present value of the old loan?
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