CMBS loan Finance Assignment Help With Solution
Each question blank is worth 2 %. Show your work for partial credit. An HP12C or equiv. is necessary.
You are a banker structuring a ten year, fixed-interest rate CMBS loan on a trophy office tower in the Plaza District of Manhattan worth $100MM. The borrower is pushing for a first mortgage of 80% loan-to-value. To make it work, you decide to divide the whole loan into a 65% LTV ‘A Note’ that will be sold in a CMBS Securitization and a B-Note for the remainder of the whole loan that will be placed with an office property REIT investor seeking higher risk / higher investment yields.
a) On an LTV basis, the B Note represents leverage points from _____% LTV to ____%LTV
b) The 10 year swap rate is 2.77% and, for the whole loan, you want to price in a spread or margin over the swap rate of 183 basis points. What is the overall interest rate coupon you’ll quote for the whole loan? ______%
c) If you think you can sell the 10-year A Note into a securitization at an interest rate of 10 year Swaps + 115 bps, what will the interest rate be on the B Note assuming the whole loan interest rate is 10 Year Swaps + 183 bps?
For question c), you may find it helpful to populate this box when ‘backing into’ the B Note Interest Rate.
Principal Balance ($s)
Interest Rate / Coupon (%)
Annual Interest ($s)
d) If Vornado REIT, which owns and buys NYC office buildings, is currently paying a dividend yield of 3.49%, do you think they will find the B Note investment attractive?
Circle: Yes / No
Note: to answer this question you don’t need the principal balance of the loan. If you want to use the principal balance and answer the questions in dollar terms vs. percent terms that’s fine but it’s more calculations to arrive at the same conclusions.
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You work in the finance department of a real estate equity investment firm and you have been thinking about re-financing a $1MM mortgage on a hotel that’s been doing well as the economy has recovered. The current loan is low leverage, so finding a lender willing to provide the same or more proceeds doesn’t seem to be a problem. However, you have to pay a yield maintenance penalty or defease the loan if you want to prepay the loan early.
The interest rate on the existing loan is 6.1% and there’s a remaining term of 3 years. The three year U.S. Treasury Rate is 0.66%. You decide to set up a yield maintenance calculation on your calculator to figure out what the prepayment penalty would be:
a) What’s the difference between the current loan’s interest rate and the three year U.S. Treasury rate? _________ Hint, this amount, divided by 12, would be the payment in a PV calculation.
b) What’s the number of monthly payment periods remaining on the loan? _____
Hint: this is the ‘n’ number of period you’ll have to use to discount the payments to PV.
c) Is there a future value associated with this Yield Maintenance income stream, or is it ‘0’? ___________ Hint: your answer is the FV amount for the HP12C.
d) What periodic discount rate ( i ) should you use for discounting the monthly yield maintenance cash flows to Present Value? ______% (annual) ______ % (periodic). Hint: it is usually the risk free rate for the appropriate # of years.
e) What would the present value (PV) of the income stream you set up be ? If you followed the steps above, the PV is expressed as a percent of the loan. ________% aka ‘points’
f) You Google a Mortgage Defeasance Calculator and conclude that defeasing, after paying fees, will cost about 11.4 points or 11.4% of the current principal balance of the loan you want to retire. Which prepayment penalty, Defeasance or Yield Maintenance, is cheaper to pursue? ___________
You are a banker projecting your potential profit realized by selling a pool of mortgages in a CMBS deal.
The 10 year mortgages have a current coupon of 4.25% and a principal balance of $1 billion.
The Weighted Average Coupon (WAC) of the CMBS bonds, once sold, will be 3.5% on the same principal balance of $1B.
The excess interest between the WAC of the mortgages and the WAC of the bonds will be sold as an IO bond and the proceeds will represent your profit.
If the Weighted Average Life of the IO bonds is projected to be 7 years (ie 84 monthly payments), and the US Treasury Rate for 7 year Treasuries is 2.03% and, for simplification purposes, you decide to use the 7 year T interest rate as your discount rate, what is the PV of this income stream, expressed either in dollar terms or percent terms? Show your inputs to the HP12C for partial credit.
PMT (either in dollar terms or in interest terms (which is easier / involves one less step) =
i (remember, the periodic i, not the annual discount rate) =
PV (either as a % (which is your profit, in points) or in gross $s) =
Russian Debt Crisis / Hedging
In August, 1998, a large Japanese investment bank held $1 billion of mortgages for sale in an upcoming CMBS securitization and did not have them hedged against interest rate changes.
The $1B of mortgages were 10 year mortgages with 25 year amortization schedules and had a weighted average interest rate of 5.5% per year.
Part I: What was the period payment for these mortgages at their in place coupon rate and amortization? The payment can be expressed in dollar terms or percent terms. Show your input on the HP12 for partial credit:
Periodic i =
FV = (Hint, after 25 years the loans are fully amortized)
Solve for PMT:
As a result of the Russians defaulting on their sovereign debts, investors panicked and bought safe U.S. Treasuries. That caused the U.S. Treasury interest rate to go down, but also left very little investor appetite for riskier fixed income investments such as commercial mortgages.
As a result, the general interest rate investors demanded to invest in the pool of mortgages described above increased from the 5.5% coupon stated above to 8%.
Using the calculations you set up above in your HP 12 C, but inputting in the new investor ‘yield to maturity’ rate, what was the new price / ‘marked to market’ value of the mortgages?
Periodic i =
Comparing the two PV’s calculated, how much money did the investment bank lose on its unhedged portfolio of mortgages?
How were bonuses that year at the bank? (Don’t answer that; time to apply to veterinary school!)
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