A property has a $25 million convertible mortgage at a fixed interest rate of 7% for 25 years (payable monthly). The loan gives the lender the option to convert the mortgage balance into a 50% equity position at the end of year 5. That is, instead of receiving the payoff on the mortgage, the lender would own 50% of the property. The loan is secured by a mortgage on a large office building that is currently valued at $40 million. The property is projected to increase 4% per year over a five year holding period.

A) Calculate the effective cost (to the borrower) of this loan

B)What is the effective cost (to the borrower) of this loan if the property sells for only $40 million after 5 years?

C) By how much (in annualized percentage) does the property have to rise over the five year holding period to justify conversion?

Please show work in excel

Answer rating: 100% (QA)

Heres how you can calculate the effective cost of the loan the effective cost if the property sells for 40 million after 5 years and the required annualized percentage increase in property value to ju... View the full answer