Compute the expected return and the volatility of senior bonds and junior bonds. Hint: compute how...

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Compute the expected return and the volatility of senior bonds and junior bonds. Hint: compute how much each category of bondholder obtains in each state of the economy, use this result to compute bonds returns in each state of the economy, use this result to compute expected return and volatility 2. The market value of L is $950,000. Compute the expected return and volatility of L. Compare with Senior Bonds. Given that certain categories of institutional investors are restricted from buying high-risk debt (say with volatility higher than 10%), why is securitization useful? 3. Suppose that B, instead of selling one large loan L to the SPV, sells many different small loans with a total face value of $1 million. Each of those loans bears a 6% interest, has a one-year maturity and the same volatility as L. Would you expect the volatility of senior secured bonds to change (no computation)? Compute the expected return and the volatility of senior bonds and junior bonds. Hint: compute how much each category of bondholder obtains in each state of the economy, use this result to compute bonds returns in each state of the economy, use this result to compute expected return and volatility 2. The market value of L is $950,000. Compute the expected return and volatility of L. Compare with Senior Bonds. Given that certain categories of institutional investors are restricted from buying high-risk debt (say with volatility higher than 10%), why is securitization useful? 3. Suppose that B, instead of selling one large loan L to the SPV, sells many different small loans with a total face value of $1 million. Each of those loans bears a 6% interest, has a one-year maturity and the same volatility as L. Would you expect the volatility of senior secured bonds to change (no computation)?

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