Can you please help me to figure it out this answer below: 3- You have recently
ID: 2618757 • Letter: C
Question
Can you please help me to figure it out this answer below:
3- You have recently invested in an office building located in NYC at a cost of $50 million. You paid for 40% of the building in cash and financed 60% with an interest only loan. For a variety of reasons you decided to denominate the loan in British pounds. At the time of the loan origination $1 could buy 0.81 British pounds. If you have a clause within your loan stating that your loan-to-value must never exceed 70%, what conversion rate will trigger a default? For simplicity, assume that the value of your property does not change.
Explanation / Answer
Value of Asset = $50 mn
Cash Paid = 40% of $50 mn = $20 mn
Loan Value in $ = 60% of $50 mn = $30 mn
Loan Value in British Pound = $30 mn x 0.81(British Pound / $) = 24.3 mn British Pound
Loan to Value = Loan / Value of Asset
70% = Loan / $50 mn
Loan = $35 mn.
This means if loan amount in $ becomes $35 mn then the default will be triggered.
24.3 mn British Pound x Exchange Rate ($ / British Pound) = $35 mn
Exchange Rate ($ / British Pound) = $35mn / 24.3 mn British Pound
Exchange Rate ($ / British Pound) = 1.44
OR Exchange Rate (British Pound / $) = 1/1.44 = 0.694
This Rate will trigger default.