Assume a bank is in the process of restructuring a $1 million loan. The following information is
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- Assume a bank is in the process of restructuring a $1 million loan. The following information is provided. The current interest rate of the loan is 8% annually and matures at the end of this year. The cost of funds for this category of loan is 8%. There is a 20% probability that the loan will be defaulted and the recovery rate is 0.
Here are the restructuring terms:
Loan payments will be stretched to 5 years.
Interest rate will be reduced by 4% for the next 5 years.
Principal payment of $500,000 in years 4 to 5.
No upfront fee.
The cost of funds for the bank increases to 10% since the risk of the loan increases after
restructuring.
b. What minimum up-front fee would entice the bank to restructure (PV of new loan>PV of old loan)? Express your answer in dollars, rounded to the nearest cent
Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
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