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How is the cost of a defeasance transaction calculated?

April 26, 2017calculated COST defeasance transaction

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How is the cost of a defeasance transaction calculated?

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The costs of a defeasance consists of both the cost of the securities and the various third-party fees associated with the documentation and processing of the transaction. The cost of the securities is a function of the spread between the interest rate of the loan and the yield of the securities. If the loan coupon is higher than the yield of the government securities or agencies then there is a defeasance premium. If the loan coupon is higher than the yield of the government securities or agencies then there is a defeasance discount.