Question: Consider a nonrecourse mortgage with one payment of $10,600,000 due one year from now. The uncertain future is characterized by the following scenarios and probabilities:
Scenario I (70% probability): Property worth $13,000,000
Scenario II (20% probability): Property worth $11,000,000
Scenario III (10% probability): Property worth $9,000,000
If foreclosure occurs, the costs paid to third parties will be $2 million. U.S. government bonds maturing in one year are yielding 6%. If investors would require an expected return risk premium of 1%, what would this loan sell for today if scenario III would result in a deedin-lieu and scenario II would result in a strategic default in which the difference between the borrower's and lender's extreme positions is split 50/50? What would be the loan's nominal yield, and what would be the present value cost of the credit risk?