Yield Maintenance - Mortgage Prepayment Penalty

[Guest]

I am trying to calculate the prepayment penalty on a commercal mortgage - it
is based on yield maintenance:

Loan Amt: $13,600,000.
Term to Maturity: 10 Yrs.
Amortization Term: 29 Yrs.
Interest Rate: 6.85%
Term Remaining to Maturity: 2 Yrs. 3 Mos.
Equivalent Yield of RemainingTerm Treasury: 4.25%


I would greatly appreciate any suggestions.

 

[Fred Smith]

For a definitive answer, you will probably have to talk to the mortgage holder
directly. If you want a good estimate, here's my suggestions.

1. Calculate the monthly payment:
=pmt(6.85%/12,29*12,13600000) -> $90,057

2. Calculate current amount owing on the mortgage:
=fv(6.85%/12,7*12+9,-90057,13600000) -> $12,081,204

3. Calculate the amount owing at the end of the amortization:
=fv(6.85%/12,10*12,-90057,13600000) -> $11,467,341

4. Calculate how much you would need to invest today at the current rate to have
the same amount at the end of the amortization:
=pv(6.85%/12,2*12+3,-90057,-11467341) -> $12,738,326

5. Prepayment penalty = 12,738,326 - 12,081,204 = 657,122

In other words, you need to invest $12,738,326 at today's rate of 4.25% to have
as much money at the end of the term as you would have investing $12,081,204 at
6.85%.

Hope this helps.