Question
A bank has made 4-year, $6,000,000 loan that pays annual interest of 6 percent. The principal is due in 4 years.The bank is willing to
A bank has made 4-year, $6,000,000 loan that pays annual interest of 6 percent. The principal is due in 4 years.The bank is willing to sell this loan with recourse at an 6.6 percent discount rate.The bank also has the option to sell this loan without recourse at a discount rate of 6.8 percent. The bankexpects to receive no interest payments or principal if the loan is defaulted.If the bank estimates a 0.5 percent probability of default on this loan over its 4-year life, what does it expect to receive if the loan is sold with recourse? Is it better off selling this loan without recourse?Why?
It expects to receive $5,379,761. It should sell it without recourse, since the expected return is lower than selling it without recourse.
It expects to receive $6,607,750. It should sell it with recourse, since the expected return is still higher than selling it without recourse.
It expects to receive $6,490,798.It should sell it with recourse, since the expected return is still higher than selling it without recourse.
It expects to receive $5,847,566.It should sell it without recourse, since the expected return is lower than selling it without recourse.
It expects to receive $5,847,566.It should sell it with recourse, since the expected return is still higher than selling it without recourse.
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