Return On The Loan Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Abstract:
This report discusses the decision that the Vice President of Foundation Investment Advisors (FIA), an organization that deals with different opportunities related to investment, has made after taking into account the recent financial crisis that occurred in 2008 and another investment opportunity. The decision is to give advice to one of its new clients, United Principal Life (UPL) for the investment, that whether it should go for direct lending in commercial mortgages or it should go for the Commercial Mortgage-Based Securities (CMBS). By constructing cash flows for both, and after determining the benefit that its client UPL would have and the cost it would bear in both the cases,FIA makes a decision that which opportunity would be best for its client.

Background:
This case revolves around Foundation Investment Advisors (FIA) and United Principal Life (UPL).
United Principal Life (UPL) is looking for different loans, by evaluating the risk and return on each loan, for the investment. In the past UPL has invested heavily and had to bear heavy losses as well, but now it was considering investing in such real estate bonds and securities that would secure the risk such as mortgage back securities. Previously UPL used to be a moderate-sized insurance company and used to offer only whole-life insurance policies, but since recently it has started offering different financial services as well, such as annuities and term life insurance. Currently UPL is looking out for different opportunities to invest $5.8 million of treasury bonds.

Return On The Loan Harvard Case Solution & Analysis
FIA on the other hand is also looking for such opportunities of investment that are less risky and gives a fixed income.
The two options that UPL has in this case is that it can either lend $ 5.8 million directly from any commercial bank or corporation, or it can lend the money through FIA, that would work as a financial intermediary for UPL.
Analyzing Direct Lending Option:
The direct lending option doesn’t require the intermediary services from any organization, but rather there would be a broker involved in this case. The lending would be based on the mortgages loans that would sum up to the total amount that UPL needs to acquire.
UPL needs to lend this amount to American Bank Plaza. The terms and conditions for this option are listed below:
• Investment Amount is $ 5 Million.
• Installments are done monthly.
• Maturity period is 5 years.
• Amortization term is 30.
Return on Investment (ROI) is computed that is totally based upon the data provided. For the investment amount of $ 5 million, Loan to Value is in between 60% to 69%, and the interest rate is 7.5%.
The cash flows are calculated with the help of Exhibit 6, given in the case-study.
Assumptions:
Mortgage amount 5,000,000
Payments per year 12.00
Interest rate 7.50%
Maturity 5.00
Amortization 30.00
Payoff payment 60.00

Year Yearly interest Yearly principal
1 (373,436.98) (46,091.72)
2 (369,858.76) (49,669.94)
3 (366,002.76) (53,525.95)
4 (361,847.40) (57,681.31)
5 (357,369.45) (62,159.26)

Year 1 2 3 4 5
Principal 46,091.72 49,669.94 53,525.95 57,681.31 62,159.26 ..........

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