You are trying to decide whether or not to refinance your current loan. You have already used

the traditional method you recall from your FINC 429 class and found that you would benefit by

$2587.30 if you decide to refinance, but since you took FINC 429 you know that this is not the

end of your decision to refinance. You decided to see whether or not you should refinance now

or wait a year and revisit the decision to refinance. Below is the information for your current loan

and the scenarios you project for the loan market a year from now:

CURRENT LOAN

$2,000,000

6% int rate compounded monthly

30 year amortization

10 year balloon payment

3 years into the loan (7 years left)

NEW LOANS ONE YEAR FROM NOW

5.5% or 7% int rate compounded monthly with a 50/50 probability

30 year amortization

6 years until balloon payment (1 year from now)

You must calculate the following in an Excel file, then e-mail it to me by the due date with

1) Calculate the refinance amount for the new loans one year from now.

2) Calculate the 5.5% loan's YTM.

3) Calculate the value of the current 6% loan using the 5.5% YTM as the discount rate.

4) Calculate the 7% loan's YTM.

5) Calculate the value of the current 6% loan using the 7% YTM as the discount rate.

6) Calculate the Prepayment Option Value and decide whether to refinance now or wait on year

and revisit the refinance scenario. Explain?