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4. 1. II. III. Consider a non-recourse mortgage with one payment of $10,600,000 due one year from now. The uncertain future is characterized by the

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4. 1. II. III. Consider a non-recourse mortgage with one payment of $10,600,000 due one year from now. The uncertain future is characterized by the following scenarios and probabilities: Scenario I: 70% probability, property worth $13,000,000 Scenario II: 20% probability, property worth $11,000,000 Scenario III: 10% probability, property worth $9,000,000 IF foreclosure occurs, the deadweight) cost paid to third parties will be $2,000,000. One-year US Treasuries are yielding 6% and investors require a risk premium of 1%. [2pts] What is strategic default, and how is it related to limited liability and the cost of foreclosure? b. [10pts) What would this loan sell for today if scenario Ill results in a deed-in-lieu, and scenario II results in a strategic default in which the difference between the borrower's and lender's extreme position is split 50/50? [2pts] What is the present value cost of credit risk? 1 a. C. 4. 1. II. III. Consider a non-recourse mortgage with one payment of $10,600,000 due one year from now. The uncertain future is characterized by the following scenarios and probabilities: Scenario I: 70% probability, property worth $13,000,000 Scenario II: 20% probability, property worth $11,000,000 Scenario III: 10% probability, property worth $9,000,000 IF foreclosure occurs, the deadweight) cost paid to third parties will be $2,000,000. One-year US Treasuries are yielding 6% and investors require a risk premium of 1%. [2pts] What is strategic default, and how is it related to limited liability and the cost of foreclosure? b. [10pts) What would this loan sell for today if scenario Ill results in a deed-in-lieu, and scenario II results in a strategic default in which the difference between the borrower's and lender's extreme position is split 50/50? [2pts] What is the present value cost of credit risk? 1 a. C

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