What would be the present value cost of the credit risk

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Question: Consider a nonrecourse mortgage with one payment of $10,600,000 due one year from now. The uncertain future is characterized by the following scenarios and probabilities:

Scenario I (70% probability): Property worth $13,000,000

Scenario II (20% probability): Property worth $11,000,000

Scenario III (10% probability): Property worth $9,000,000

If foreclosure occurs, the costs paid to third parties will be $2 million. U.S. government bonds maturing in one year are yielding 6%. If investors would require an expected return risk premium of 1%, what would this loan sell for today if scenario III would result in a deedin-lieu and scenario II would result in a strategic default in which the difference between the borrower's and lender's extreme positions is split 50/50? What would be the loan's nominal yield, and what would be the present value cost of the credit risk?

Reference no: EM131734625

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