This is an interest only balloon loan over 24 months at a

Question

This is an interest only balloon loan over 24 months at a rate of 8 percent. You see that the borrower still owes the lender $1000000 after 24 months

	Begin balance	Interest	principal	end balance
1	1000000	6666.667	0	1000000
2	1000000	6666.667	0	1000000
3	1000000	6666.667	0	1000000
4	1000000	6666.667	0	1000000
5	1000000	6666.667	0	1000000
6	1000000	6666.667	0	1000000
7	1000000	6666.667	0	1000000
8	1000000	6666.667	0	1000000
9	1000000	6666.667	0	1000000
10	1000000	6666.667	0	1000000
11	1000000	6666.667	0	1000000
12	1000000	6666.667	0	1000000
13	1000000	6666.667	0	1000000
14	1000000	6666.667	0	1000000
15	1000000	6666.667	0	1000000
16	1000000	6666.667	0	1000000
17	1000000	6666.667	0	1000000
18	1000000	6666.667	0	1000000
19	1000000	6666.667	0	1000000
20	1000000	6666.667	0	1000000
21	1000000	6666.667	0	1000000
22	1000000	6666.667	0	1000000
23	1000000	6666.667	0	1000000
24	1000000	6666.667	0	1000000

You see that the borrower still owes the lender $1000000 after 24 months most construction loans to builders are this type.

Suppose after 24 months, the builder asks extension of this loan for another year. The builder continues to pay monthly interest for the six month, thereafter he skips payment for three months, and then files for chapter 11.

Questions:

1. What is the value of this loan to bank? See average recovery rate.

2. Banks are required to Mark to Market their portfolio of assets to fair market value. How much of the $1,000,000. loan the bank is expected to recover?

To answer the above question, students are expected to look at historical recovery rate published by Moodys' or Fitch rating agencies.

See averge recovery rate:

Recovery Rate:

Class	Mean (%)	Standard Deviation (%)
Senior Secured	52.31%	25.15%
Senior Unsecured	48.84%	25.01%
Senior Subordinated	39.46%	24.59%
Subordinated	33.17%	20.78%
Junior Subordinated	19.69%	13.85%