Reference no: EM131717743

Question: Giant National Bank has placed a group of 10,000 consumer loans bearing an average expected gra& annual yield of 8 percent in a package to be security zecl, The investment bank advising Giant estimates that the securities will sell at a slight discount from par that results in a net interest cost to the issuer of 9 percent. Based on recent experience with similar types of loans, the bank expects 3 percent of the packaged loans to default without any recovery for the lender and IS agreed to set aside a cash reserve to cover this anticipated loss. Underwriting and advisory services provided by the investment banking firm will cost 0.5 percent. Giant will also seek a liquidity facility, costing 0.5 percent, and a credit guarantee if actual loan defaults should exceed the expected loan default rate, costing 0.6 percent. Please calculate residual income for Giant from this loan security ration.