You are a banker projecting your potential profit realized b

You are a banker projecting your potential profit realized by selling a pool of mortgages in a CMBS deal.

The 10 year mortgages have a current coupon of 4.25% and a principal balance of $1 billion.

The Weighted Average Coupon (WAC) of the CMBS bonds, once sold, will be 3.5% on the same principal balance of $1B.

The excess interest between the WAC of the mortgages and the WAC of the bonds will be sold as an Interest Only (IO) bond and the proceeds will represent your profit.
If the Weighted Average Life of the IO bonds is projected to be 7 years (ie 84 monthly payments), and the US Treasury Rate for 7 year Treasuries is 2.03% and, for simplification purposes, you decide to use the 7 year T interest rate as your discount rate, what is the PV of this income stream, expressed either in dollar terms or percent terms? Show your inputs.
FV =
PMT (either in dollar terms or in interest terms (which is easier / involves one less step) =
n =
i (remember, the periodic i, not the annual discount rate) =

Solve for:
PV (either as a % (which is your profit, in points) or in gross $s) =

Solution

profit = 4.25%-3.50% = 0.75%

Below are the outputs in excel:

? 1,06,76,90,532

Formulas are: PMT (https://support.office.com/en-us/article/PMT-function-0214DA64-9A63-4996-BC20-214433FA6441)

FV (https://support.office.com/en-us/article/FV-function-2EEF9F44-A084-4C61-BDD8-4FE4BB1B71B3)

PV (https://support.office.com/en-us/article/PV-function-23879D31-0E02-4321-BE01-DA16E8168CBD). Please go through and let me know of any questions.