Question: City Bank has made a 10-year, $2 million loan that pays annual interest of 10 percent per year. The principal is expected at maturity.
a. What should it expect to receive from the sale of this loan if the current market rate on loans is 12 percent?
b. The prices of loans of this risk are currently being quoted in the secondary market at bid-offer prices of 88-89 cents (on each dollar). Translate these quotes into actual prices for the above loan.
c. Do these prices reflect a distressed or nondistressed loan? Explain.