Explanation:
A refinancing cost of 2 points means the borrower must pay 2% of the outstanding balance to exercise the prepayment option.
$100,000$2,000$100,000 + $2,000 = $102,000So the effective strike price is $102,000.
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Q-52.3 If the cost to refinance is two (2) points on a mortgage loan with an outstanding balance of $100,000, what is the effective strike price of the prepayment option?
A
$2,000
B
$100,000
C
$102,000
D
$100,000 plus (+) discounted PV(2% over life of loan)
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