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?

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b. What is the present value of the rescheduled loan for the bank?

c. Is the concessionality positive or negative for the bank?


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