A bank is in the process of renegotiating a three-year non-amortizing loan. The principal outstanding is $20 million, and the interest rate is 8 per cent. The new terms will extend the loan to 10 years at a new interest rate of 6 per cent. The cost of funds for the bank is 7 per cent for both the old loan and the renegotiated loan. An upfront fee of 50 basis points 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. What is the concessionality for the bank?

d. What should be the upfront fee to make the concessionality zero?

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