FIN 3334- Lender risk mitigation notes (lesson 4)


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Unformatted text preview: ge $5,000 in origination fees and you expect interest rates to increase by 10% each year? (Hint: Use CF Function of Financial Calculator) CF0: CF1: F1: CF2: APR = F2: CF3: F3: What is the EBC of this Loan if you prepay after the 36th payment? APR Practice Problem: You have been offered a $500k 7/1 Hybrid ARM Loan with 1pt in origination fees, teaser of 4.8%, margin of 289bp, and future composite rates indexed to LIBOR, which was 3.24% at the time of origination. What is the APR of this loan with no caps? What is the APR of the loan with a 100bp periodic cap? IV. Prepayment Risk A. Borrowers Can Prepay Strategically 1. When Selling Property. 2. Opportunity Costs Increase 3. Interest Rates Decrease B. Bad for Lender Since Have to Re‐Invest at Lower Interest Rate 1. Can Charge More Fees Upfront in Exchange for Lower Interest Rate (ie, Discount Points) 2. Allows Borrowers to Reveal Prepayment Behavior C. Mandate Prepayment Lock‐Out Clauses: 1. Specified Periods when Prepayment is Forbidden 2. Not Uncommon on Commercial RE Loans (6‐months to 10‐years) D. Charge Prepayment Penalties 1. Fixed Prepayment Penalties...
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This document was uploaded on 03/20/2014 for the course FIN 3334 at Texas Tech.

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