A bank is in the process of considering restructuring a $10 million loan. The original loan is due in full 1 year from today, pays an interest rate of 5.5% and the cost of funds is also 5.5%. For this loan there is a 20% chance of no recovery on default, 50% chance of $7 million recovery, and 30% chance the loan pays as planned.

What is the expected present value of the existing loan? (5pt)

If the bank restructures the loan, the terms of the restructuring terms are as follows:

Loan payments will be stretched to 7 years.

Interest rate will be reduced to 4% for the next 5 years and then increased to 5% in year 6 and 6% in year 7.

Principal payment of $3,000,000 will be due in year 5 and principal payments of $3,500,000 are due in years 6 and 7.

The borrower would pay a $100,000 upfront restructuring fee.

The cost of funds for the bank increases to 11% since the risk of the loan increases after restructuring

b. What would be the present value of the restructured loan?