A bank is in the process of renegotiating a loan. The principal outstanding is $50 million and is to be paid back in two instalments of $25 million each, plus interest of 8 per cent. The new terms will stretch the loan out to five years with no principal payments except for interest payments of 6 per cent for the first three years. The principal will be paid in the last two years in payments of $25 million along with the interest. The cost of funds for the bank is 6 per cent for both the old loan and the renegotiated loan. An upfront fee of 1 per cent 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?
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c. Is the concessionality positive or negative for the bank?