The Return of the Loan Case Solution
Direct Lending:
Direct lending is defined as the loan in which the loan provider (except bank) makes the loan to the companies without any intermediates such as abroker, investment funds or etc.
United Principle Life (UPL) has to lend its 5.8million in mortgage loans. UPL has two choices either to invest directly or through the intermediate Foundation Investment Advisor (FIA). If the company choose direct lending option then it may lend its 5.8million to commercial properties in our case which is The Bank of American Plaza.
According to the terms of the direct lending, UPL can invest up to $5million under this optionfor the maturity period of 5 years and 30 yearsamortizationperiod. Hence by using the amortization table we conclude yearly interest and principal payments which are 373436 and 46091,369858 and 49669, 3366002 and 53525,361847 and 57681, and 357369 and 62159 for the year 1, year 2, year 3, year 4 and year 5 respectively.
The sum of interest and principalpayments of respective years will be considered as the total cash flows. However, by subtracting origination and other fees from it, we can determine the net cash flows of direct lending. The origination fees are 1% of themortgage loan and other fees are$15000, therefore, the net cash flows are approximately $2032643.
| Year | 1 | 2 | 3 | 4 | 5 |
| Principle | $ 46,091.72 | $ 49,669.94 | $ 53,525.95 | $ 57,681.31 | $ 62,159.26 |
| Interest | $ 373,436.98 | $ 369,858.76 | $ 366,002.76 | $ 361,847.40 | $ 357,369.45 |
| Cash Inflows | $ 419,528.71 | $ 419,528.71 | $ 419,528.71 | $ 419,528.71 | $ 419,528.71 |
Expected Return:
The expected return rate is defined as the return rate which the investor receives on yearly basis. In the case of the loan, the annual return rate is the interest rate.In our case, we assumed that the direct lending of 5million will have an LTV between 60-69%, therefore, the annual interest rate (expected return rate) would be 7.5%.
Promised Cash flows for each of the five Principle Receiving Bonds:
We have five categories of the BondsA-1, A-2, B, C and D. UPL can invest in these five bonds through the FIA.
Bond A-1
In bond A-1 the company can invest $20million at the interest rate of 2.37% hence the total interest for year-1 will be 0.4734million while the principal payment can be derived from the six properties which are approximately $4.86million for year-1. Hence the total cash flow for year-1 from A-1 bond will be approximately $5.338 million. Remaining years can be calculated using the same approach.
Bond A-2
In bond A-2 the company can invest $220.791million at the interest rate of 3.69% hence the total interest for year-1 will be approximately $8.138million however in this bond company will not receive anyprincipal amount until the first four years while in year 5 the total principle will be received.Therefore the total cash flow for year-1 from A-2 bond will be same as the interest which is approximately $8.138. Remaining years can be calculated using the same approach.
| Bond A-2 | 3.69% | |||||
| Beginning balance | $ 220,791,000.00 | $ 220,791,000.00 | $ 220,791,000.00 | $ 220,791,000.00 | $ 220,791,000.00 | |
| Principal | $ - | $ - | $ - | $ - | $ 26,716,398.47 | |
| Interest | $ 8,138,356.26 | $ 8,138,356.26 | $ 8,138,356.26 | $ 8,138,356.26 | $ 8,138,356.26 | |
| Ending balance | $ 220,791,000.00 | $ 220,791,000.00 | $ 220,791,000.00 | $ 220,791,000.00 | $ 220,791,000.00 | $ 194,074,601.53 |
| Total cash flow | $ 8,138,356.26 | $ 8,138,356.26 | $ 8,138,356.26 | $ 8,138,356.26 | $ 34,854,754.73 |
Bond B
In bond B the company can invest $18.575million at the interest rate of 4.63% hence the total interest for year-1 will be approximately $0.860million however in this bond company will not receive any principal amount until the first four years while in year 5 the total principle will be received. Therefore the total cash flow for year-1 from B bond will be same as the interest which is approximately $0.860. Remaining years can be calculated using the same approach.
| Bond B | 4.63% | |||||
| Beginning balance | $ 18,575,000.00 | $ 18,575,000.00 | $ 18,575,000.00 | $ 18,575,000.00 | $ 18,575,000.00 | |
| Principal | $ - | $ - | $ - | $ - | $ 26,716,398.47 | |
| Interest | $ 860,113.52 | $ 860,113.52 | $ 860,113.52 | $ 860,113.52 | $ 860,113.52 | |
| Ending balance | $ 18,575,000.00 | $ 18,575,000.00 | $ 18,575,000.00 | $ 18,575,000.00 | $ 18,575,000.00 | $ (8,141,398.47) |
| Total cash flow | $ 860,113.52 | $ 860,113.52 | $ 860,113.52 | $ 860,113.52 | $ 27,576,511.98 |
Bond C
In bond C the company can invest $20.9million at the interest rate of 4.6% hence the total interest for year-1 will be approximately $0.974million however in this bond company will not receive any principal amount until the first four years while in year 5 the total principal amount will be received. Therefore the total cash flow for year-1 from C bond will be same as the interest which is approximately $0.974. Remaining years can be calculated using the same approach...............
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