Note: to answer this question you dont need the principal balance of the loan. If you want to use the principal balance and answer the questions in dollar terms vs. percent terms thats fine but its more calculations to arrive at the same conclusions. You work in the finance department of a real estate equity investment firm and you have been thinking about re-financing a $1MM mortgage on a hotel thats been doing well as the economy has recovered. The current loan is low leverage, so finding a lender willing to provide the same or more proceeds doesnt seem to be a problem. However, you have to pay a yield maintenance penalty or defease the loan if you want to prepay the loan early. The interest rate on the existing loan is 6.1% and theres a remaining term of 3 years. The three year U.S. Treasury Rate is 0.66%. You decide to set up a yield maintenance calculation on your calculator to figure out what the prepayment penalty would be:

a) Whats the difference between the current loans interest rate and the three year U.S. Treasury rate? ______ Hint, this amount, divided by 12, would be the payment in a PV calculation.

b) Whats the number of monthly payment periods remaining on the loan? ______ Hint: this is the n number of period youll have to use to discount the payments to PV.

c) Is there a future value associated with this Yield Maintenance income stream, or is it0? ______ Hint: your answer is the FV amount for the HP12C.

d) What periodic discount rate ( i ) should you use for discounting the monthly yield maintenance cash flows to Present Value? ____% (annual) _____% (periodic). Hint: it is usually the risk free rate for the appropriate # of years.

e) What would the present value (PV) of the income stream you set up be ? If you followed the steps above, the PV is expressed as a percent of the loan. ______% (aka points)

f) You Google a Mortgage Defeasance Calculator and conclude that defeasing, after paying fees, will cost about 11.4 points or 11.4% of the current principal balance of the loan you want to retire. Which prepayment penalty, Defeasance or Yield Maintenance, is cheaper to pursue? _________