A Group of Loans Pooled for Securitization Is Expected to Yield

question 31

Multiple Choice

A group of loans pooled for securitization is expected to yield a return of 23%.The coupon rate promised to investors on securities issued against the pool of loans is 8%.The default (charge-off) rate on the pooled loans is expected to be 4.5%.The fee to compensate a servicing institution for collecting payments on the loans is 2%.Fees to set up credit and liquidity enhancements are 3%.The fee for advice on how to set up the pool of securitized loans is 1%.What is the residual income on this pool of loans?

• A)18.5%
• B)9%
• C)4.5%
• D)2%
• E)None of the options is correct

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Definitions:

Nonfinancial Firms

Companies that primarily deal in products and services rather than financial instruments and markets, such as manufacturing, retail, and technology firms.

Acquisitions

The process by which one company purchases most or all of another company's shares to gain control of that company.

Divestitures

Refers to the process of a company selling off or liquidating parts of its business or assets.

IFRS

International Financial Reporting Standards, a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.