A bank is in the process of renegotiating an amortizing $150 million loan that has two annual remaining payments. The agreement requires reducing the interest rates from the existing 7% to 5% and to extend the maturity from two to five years. A grace period of two years is offered during which time only interest will be paid. In the last three years, principal payments of $50 million are expected each year. An up-front fee of 1% will be collected as part of the renegotiating fee.

a. If the cost of funds to the bank is 8% before rescheduling and 8.75% after rescheduling, what is the presint value of the old and new loan?

b. What should the approximate up-front fee in percent be in order for the bank to have the present value of the old and new loan be equal?