Question
You are trying to decide whether or not to refinance now or wait a year by calculating the value of the option to prepay given
You are trying to decide whether or not to refinance now or wait a year by calculating the value of the option to prepay given the following information:
Current Loan:
o $2,000,000
o 7% o 30 yr (amortization)
o 10 yr (balloon)
o Issued 4 yrs ago (6 yrs left)
o Prepayment penalty of 1.5 points
o OLB with prepay penalty = $1,910,871
New Loan:
o 5.5% (5.74% YTM) or 8.5% (9.19% YTM) with 50/50 probability
o 30 yr (amortization)
o 6 yrs left until balloon
o Prepayment penalty of 1.5 points
o OLB with prepay penalty = $1,910,871
o discount points and fees = $19,109
PV of current (7%) loan @ 5.74% disc rate = $1,981,649
PV of current (7%) loan @ 9.19% disc rate = $1,723,915
30% discount rate
Refinance savings for current year = $12,000
A. Calculate the NPV and Net Benefit of prepayment option for the 5.5% scenario. YOU MUST SHOW ALL CALCULATIONS TO RECEIVE FULL CREDIT!
B. Calculate the NPV and Net Benefit of prepayment option for the 8.5% scenario. YOU MUST SHOW ALL CALCULATIONS TO RECEIVE FULL CREDIT!
C. Calculate the value of the option to prepay using the probability weighted scenarios. Should you refinance or wait a year and revisit the situation? YOU MUST SHOW ALL CALCULATIONS TO RECEIVE FULL CREDIT!
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
