1. A bank is in the process of renegotiating an amortizing $100 million loan. The current loan requires four principal payments of $25 million each for the next four years. The agreement requires reducing the interest rates from the existing 8% to 6% and to extend the maturity from four to seven years. A grace period of five years is offered during which time only interest will be paid. Principal payments of $50 million each are expected in the last two years. An up-front fee of 1% will be collected as part of the renegotiating fee.

If the cost of funds to the bank is 6% before rescheduling and 6.5% after rescheduling, are the new terms better than the old terms?

2.Continuing with the previous problem, assume the country wishes to pay no payments, interest or principal, for the next five years. It will pay $75 million in year 6 and pay the remaining balance of $25 million in year 7. The cost of funds is 5.5% because of IMF guarantees, and the bank continues to charge 1% up-front fee? The interest rate charged to the client is still 6%. IS the bank better off? Explain.