Question

Assume an FI originates a pool of short-term real estate loans worth $20 million with maturities of five years and paying interest rates of 9 percent (paid annually). The loans are amortized.

a. What is the average payment received by the FI (both principal and interest) if no prepayment is expected over the life of the loans?
b. If the loans are converted into real estate certificates and the FI charges a 50 basis points servicing fee (including insurance), what are the payments expected by the holders of the securities, if no prepayment is expected?

Answer 1

(a)

Loan amount = $ 20 Million

Period = 5 years, interest rate = 9%

Suppose anuual payment (Principal + interest) = "X"

Loan amount ($20 million) = X*(PVAF @9%,5 years)

$20 million = X*3.89

X= $5.14 million ( Annual payment)

(b)

If the company converst it in to real estate certificate with a 50 BPS premium, the interest rate the company would give would be @8.5%

Loan amount ($20 million) = X*(PVAF @8.5%,5 years)

$20 million = X*3.94

X= $5.08 million ( Annual payment)