You are trying to decide whether or not to refinance now or wait a year...
60.1K
Verified Solution
Link Copied!
Question
Accounting
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!
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
- Unlimited Question Access with detailed Answers
- Zin AI - 3 Million Words
- 10 Dall-E 3 Images
- 20 Plot Generations
- Conversation with Dialogue Memory
- No Ads, Ever!
- Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Other questions asked by students
StudyZin's Question Purchase
1 Answer
$0.99
(Save $1 )
One time Pay
- No Ads
- Answer to 1 Question
- Get free Zin AI - 50 Thousand Words per Month
Unlimited
$4.99*
(Save $5 )
Billed Monthly
- No Ads
- Answers to Unlimited Questions
- Get free Zin AI - 3 Million Words per Month
*First month only
Free
$0
- Get this answer for free!
- Sign up now to unlock the answer instantly
You can see the logs in the Dashboard.