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How much prepayment penalty must the borrower pay

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Question: (Yield Maintenance) A commercial mortgage is written for $1 million at 8% with 30-year amortization and a 10-year balloon payment. A yield-maintenance prepayment penalty is included as follows. If the borrower pays the loan off early, he must pay the lender the present value of the remaining contractual payments on the loan discounted at the then prevailing rates on T-bonds of a maturity equivalent to the remaining time on the loan, plus a margin of 50 basis points. (The difference between MEY and BEY is ignored, that is, the BEY T-bond rate plus margin is applied directly, to the remaining monthly cash flows in the loan as if it were a MEY rate.) Now suppose the borrower prepays the loan after seven years. Suppose that on that date three-year government bonds are yielding 5.50%. How much prepayment penalty must the borrower pay?

Reference no: EM131734704

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