You are trying to decide whether or not to refinance now or wait a year...
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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!
Answer & Explanation
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