Question: A bank is in the process of renegotiating a three-year nonamortizing loan. The principal outstanding is $20 million, and the interest rate is 8 percent.

A bank is in the process of renegotiating a three-year nonamortizing loan. The principal outstanding is $20 million, and the interest rate is 8 percent. The new terms will extend the loan to 10 years at a new interest rate of 6 percent. The cost of funds for the bank is 7 percent for both the old loan and the renegotiated loan. An up-front fee of 50 basis points is to be included for the renegotiated loan.
a. What is the present value of the existing loan for the bank?
b. What is the present value of the rescheduled loan for the bank?
c. What is the concessionality for the bank?
d. What should be the up-front fee to make the concessionality zero?

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