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

Background:
This case is mainly dealing with analysis of the impact of financial crisis of year 2008 over the investments in commercial mortgages, the investment was also determined pre, and post crisis period in the mortgage backed securities such as CMBS. The company is UPL, which is considering the different loan options, it returns,and it is evaluating its risks according to the ratings of the bonds.
Investment by the UPL was in passive mode and it was considering the different real estate investment options to secure its investments after the financial crisis for the purpose of diversification and securing its default and liquidity risk by investing in less riskier bonds and mortgage back securities.
FIA has the customer or client base, which consists of not for profit organizations such as endowment funds, charities, municipalities and foundations. Moreover, they are also considering the options of investments in mostly those securities, which consist of fixed income such as bonds either municipal or corporate, depending upon the risk appetite of the clients. They also provide advisory services to invest in residential and CMBS.

The Return of the Loan Harvard Case Solution & Analysis

Financial Analysis of different options:
The investments of the company were evaluated using different options of the bonds and the total categories of the bond were around 5 and the evaluation was made based on the promised cash flows and the company’s evaluation was carried out by the advisory company FIA, who would be recommending the best option for UPL company.
The different bonds taken into consideration for the investment include A-2, A-1, C, B and D, which consist of different credit rating given by Moody’s.
Year 1 Year 2 Year 3 Year 4 Year 5
Total Principal 4,864,906.65 5,092,844.25 5,331,755.21 5,582,185.03 5,844,707.33
Total Interest 14,442,958.89 14,215,021.28 13,976,110.32 13,725,680.50 13,463,158.21

Bond A-2
Company has an opportunity to invest in bond A-2 and the amount recommended is around 220.79 million dollars at around 3.69% interest rate, which would make the company’s interest payment for the first year at around 8.14 million dollars. Whereas, company will not receive any principal payments because it is assumed that the prepayment rate is zero percent.Moreover, the principal payments will be paid in full at the maturity date. The interest amount is same for the rest of years because it has fixed interest rate.
The ending balance of the bond is around 220.791 million and the total cash flows would be around equal payment of cash flows at around 8.138 million annually but it has cash flows in the last year at around 34.85 million. It will help the company in deciding about the selection of investment option and minimize its default risk and liquidity risk with the better return on its investment to manage the portfolio and investment policy statement of UPL through FIA.
Bond A-2 3.69%
Beginning balance 220,791,000 220,791,000 220,791,000 220,791,000 220,791,000
Principal - - - - 26,716,398
Interest 8,138,356 8,138,356 8,138,356 8,138,356 8,138,356
Ending balance 220,791,000 220,791,000 220,791,000 220,791,000 220,791,000 194,074,602
Total cash flow 8,138,356 8,138,356 8,138,356 8,138,356 34,854,755..........

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