Suppose that a bank securitizes a package of its loans that bears a gross annual interest yield of 13 percent. The securities issued against the loan package promise interested investors an annualized yield of 8.25 percent. The expected default rate on the packaged loans is 3.5 percent. The bank agrees to pay an annual fee of 0.35 percent to a security dealer to cover the cost of underwriting and advisory services and a fee of 0.25 percent to Arunson Mortgage Servicing Corporation to process the expected payments generated by the packaged loans. If the above items represent all the costs associated with this securitization, can you calculate the percentage amount of residual income the bank expects to earn from this particular transaction?
Answer to relevant QuestionsWhat are the risks of using loan sales as a significant source of funding for banks and other financial institutions?When is a credit default swap useful? Why?Why do banks and other institutions choose to devote a significant portion of their assets to investment securities? If a government bond is expected to mature in two years and has a current price of $950, what is the bond's YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent? Suppose this bond is sold one year ...Bacone National Bank has structured its investment portfolio, which extends out to four-year maturities, so that it holds about $11 million each in one-year, two-year, three-year, and four-year securities. In contrast, ...
Post your question