Reference no: EM132198499

Question -

A) A bank has placed 5,000 consumer loans in a package to be securitized. These loans have an annual yield of 14.75 percent. The bank estimates that the securities on these loans are priced to yield 10.25 percent. The bank's default (charge-off) rate on the pooled loans is expected to be 1.25 percent. Underwriting and advisory services will cost 0.20 percent, and a credit guarantee, if more loans default than expected, will cost 0.30 percent. What is the residual income from this loan securitization?

B) XYZ Corporation is requesting a loan for repair of some assembly-line equipment in the amount of $12.45 million. The nine-month loan is priced by Farmers Financial Corporation at a 7.5 percent rate of interest. However, the finance company tells XYZ that if it obtains a suitable credit guarantee the loan will be priced at 6.5 percent. ABC Bank agrees to sell XYZ a standby credit guarantee for $12,000. Is XYZ likely to buy the standby credit guarantee ABC Bank has offered? Please explain.

C) A group of loans pooled for securitization is expected to yield a return of 22%. The coupon rate promised to investors on securities issued against the pool of loans is 7%. The default (charge off) rate on the pooled loans is expected to be 4.2%. The fee to compensate a servicing institution for collecting payments on the loans is 1.8%. Fees to set up credit and liquidity enhancements are 2.5%. The fee for advice on how to set up the pool of securitized loans is 1.2%. What is the residual income on this pool of loans?

D) The coupon rate promised to investors on securities issued against a pool of loans is 5.75%. The default rate on the pool of loans is expected to be 3.25%. The fee to compensate a servicing institution for collecting payments on the loan is 1.75%. Fees to set up credit and liquidity enhancements are 3%. The residual income on this pool of loans is 6%. What is the expected yield on this pool of loans?