A bank has made a 8-year, $2,000,000 loan that pays annual interest of 7 percent. The principal is due in 8 years. The bank is willing to sell this loan with recourse at an 7.8 percent discount rate. The bank also has the option to sell this loan without recourse at a discount rate of 8.1 percent. If the bank estimates a 2 percent probability of default on this loan over its 8-year life, what does it expect to receive if the loan is sold with recourse? Is it better off selling this loan without recourse? Why?
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