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:
  • $2,000,000
  • 7%
  • 30 yr (amortization)
  • 10 yr (balloon)
  • Issued 4 yrs ago (6 yrs left)
  • Prepayment penalty of 1.5 points
  • OLB with prepay penalty = $1,910,871
• New Loan:
  • 5.5% (5.74% YTM) or 8.5% (9.19% YTM) with 50/50 probability
  • 30 yr (amortization)
  • 6 yrs left until balloon
  • Prepayment penalty of 1.5 points
  • OLB with prepay penalty = $1,910,871
  • 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!