A bank has made a three-year $10 million dollar loan that pays annual interest of 8 percent. The principal is due at the end of the third year.

a.The bank is willing to sell this loan with recourse at an interest rate 8.5 percent? What price should it receive for this loan?

If the bank sells with recourse, it should expect:

PVA_{n=3, k=8.5} *(0.80) + PV_{n=3, k=8.5} *(10) = $9.8723 million

b.The bank has the option to sell this loan without recourse at a discount rate of 8.75 percent. What price should it receive for this loan?

If the bank sells without recourse, it should expect:

PVA_{n=3, k=8.75}*(0.80) + PV_{n=3, k=8.75}*(10) = $9.8093 million