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What price should receive for the loan

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You are a manager of FI that has made a four-year $15 million loan that pays annual interest of 7 per cent. The principal is due at the end of the third year.

Question a. One possible strategy is to sell this loan with recourse at an interest rate of 9 per cent. What price should FI receive for this loan?

Question b. The bank has the option to sell this loan without recourse at a discount rate of 9.2 per cent. What price should it receive for this loan?

Question c. If the bank expects a 1 per cent probability of default on this loan, is it better to sell this loan with or without recourse? It expects to receive no interest payments or principal if the loan is defaulted.

Question d. Discuss if the sale of the loan with recourse can change the duration characteristics of the balance sheet. How?

Reference no: EM132609224

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