A $20 million loan outstanding to the Nigerian government is currently in arrears with City Bank. After extensive negotiations, City Bank agrees to reduce the interest rate from 10 percent to 6 percent and to lengthen the maturity of the loan to 10 years from the present 5 years remaining to maturity. The principal of the loan is to be paid at maturity. There will be no grace period and the first interest payment is expected at the end of the year. a) If the cost of funds is 5 percent for the bank, what is the present value of the loan prior to the rescheduling? b) What is the present value of the rescheduled loan to the bank? c) What is the concessionality of the rescheduled loan if the cost of funds remains at 5 percent and an up-front fee of 5 percent is charged? d) What up-front fee should the bank charge to make the concessionality equal zero?
A $20 million loan outstanding to the Nigerian government is currently
in arrears with City Bank. After extensive negotiations, City Bank
agrees to reduce the interest rate from 10 percent to 6 percent and to
lengthen the maturity of the loan to 10 years from the present 5 years
remaining to maturity. The principal of the loan is to be paid at
maturity. There will be no grace period and the first interest payment is
expected at the end of the year.
a) If the cost of funds is 5 percent for the bank, what is the present
value of the loan prior to the rescheduling?
b) What is the present value of the rescheduled loan to the bank?
c) What is the concessionality of the rescheduled loan if the cost of
funds remains at 5 percent and an up-front fee of 5 percent is
charged?
d) What up-front fee should the bank charge to make the
concessionality equal zero?
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