You are trying to decide whether or not to refinance now or wait a year by calculating the value of the option to prepay given the following information:

Current Loan:

$2,000,000

7%

30 yr (amortization)

10 yr (balloon)

Issued 4 yrs ago (6 yrs left)

Prepayment penalty of 1.5 points

OLB with prepay penalty = $1,910,871

New Loan:

5.5% (5.74% YTM) or 8.5% (9.19% YTM) with 50/50 probability

30 yr (amortization)

6 yrs left until balloon

Prepayment penalty of 1.5 points

OLB with prepay penalty = $1,910,871

discount points and fees = $19,109

PV of current (7%) loan @ 5.74% disc rate = $1,981,649

PV of current (7%) loan @ 9.19% disc rate = $1,723,915

30% discount rate

Refinance savings for current year = $12,000

A. Calculate the NPV and Net Benefit of prepayment option for the 5.5% scenario.

B. Calculate the NPV and Net Benefit of prepayment option for the 8.5% scenario.

C. Calculate the value of the option to prepay using the probability weighted scenarios. Should you refinance or wait a year and revisit the situation?