Mr. Ed, a long-time resident of Peterborough, has just purchased a new 100, 000 square meter horse stable for $5, 000, 000.00, putting 20% down and financing the rest with an interest only mortgage with an annual coupon rate of 4%. and amortized over 240 months. He has already paid his required coupon for month 239 and must make his final mortgage repayment to his bank tomorrow, the first day of month 240. Unfortunately for Ed, the riding lessons business has tanked since covid began and his stable is today worth only $3, 813, 223.56. He contemplates whether to pay off his loan or default on his final payment. Anticipating waves of covid-caused defaults, however, today the provincial government is writing a new regulation, to be implemented to deter property owners who, like Ed, might default on their loans. The new regulation requires any given property owner to pay a fine on the day of his loan maturity if he in fact does default. A govenment representative asks you to calculate the minimum fine that could be levied on Ed to make him indifferent between defaulting and paying off his loan. You find that this minimum fine for Ed is
Mr. Ed, a long-time resident of Peterborough, has just purchased a new 100, 000 square meter horse stable for $5, 000, 000.00, putting 20% down and financing the rest with an interest only mortgage with an annual coupon rate of 4%. and amortized over 240 months. He has already paid his required coupon for month 239 and must make his final mortgage repayment to his bank tomorrow, the first day of month 240. Unfortunately for Ed, the riding lessons business has tanked since covid began and his stable is today worth only $3, 813, 223.56. He contemplates whether to pay off his loan or default on his final payment. Anticipating waves of covid-caused defaults, however, today the provincial government is writing a new regulation, to be implemented to deter property owners who, like Ed, might default on their loans. The new regulation requires any given property owner to pay a fine on the day of his loan maturity if he in fact does default. A govenment representative asks you to calculate the minimum fine that could be levied on Ed to make him indifferent between defaulting and paying off his loan. You find that this minimum fine for Ed is
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Mr. Ed, a long-time resident of Peterborough, has just purchased a new 100, 000 square meter horse
stable for $5, 000, 000.00, putting 20% down and financing the rest with an interest only mortgage with
an annual coupon rate of 4%. and amortized over 240 months. He has already paid his required coupon
for month 239 and must make his final mortgage repayment to his bank tomorrow, the first day of
month 240. Unfortunately for Ed, the riding lessons business has tanked since covid began and his
stable is today worth only $3, 813, 223.56. He contemplates whether to pay off his loan or default on his
final payment. Anticipating waves of covid-caused defaults, however, today the provincial government
is writing a new regulation, to be implemented to deter property owners who, like Ed, might default on
their loans. The new regulation requires any given property owner to pay a fine on the day of his loan
maturity if he in fact does default. A govenment representative asks you to calculate the minimum fine
that could be levied on Ed to make him indifferent between defaulting and paying off his loan. You find
that this minimum fine for Ed is
$140,000.00
$450, 796.00
$200,000.00
none of the above
O $326,000.20
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