A bank has placed 5000 consumer loans in a package to be securitized. These loan

Question

A bank has placed 5000 consumer loans in a package to be securitized. These loans have an annual yield of 15.25 percent. This bank estimates that the securities on these loans are priced to yield 10.95 percent. The bank expects 1.45 percent of the loans will default. Underwriting and advisory services will cost .25 percent and a credit guarantee if more loans default than expected will cost .35 percent. What is the residual income from this loan securitization? A) 3.70 percent B) 4.30 percent C) 2.25 percent D) 5.15 percent E) None of the above PLEASE WORK PROBLEM OUT

Explanation / Answer

residual income = annual yield - yield pricing - loan default - advisory service cost - credit guarantee = 15.25-10.95-1.45-.25-.35 =2.25%

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