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A bank made a three-year, $10 million dollar loan that pays annual interest of 5%. The principal is due after the end of the third
A bank made a three-year, $10 million dollar loan that pays annual interest of 5%. The principal is due after the end of the third year. The bank has two alternatives: a.Sell the loan with recourse at a 5.5% discount rate. b.Sell the loan without recourse at a 5.75% discount rate. If the bank expects a 0.50 % probability of default on this loan over its three-year life and expects to receive no interest payments or principal if the loan is defaulted. Show whether the bank should sell the loan with or without recourse.
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