5. ConnBank has made two types of loans-A and B-each has the principal of $1. The probability of repayment is 0.9 and 0.6 for A loan and B loan, respectively. For the sake of simplicity, let's ignore the interest rate and interest rate margins. 1) Explain why selling its loan directly to outside investors may not work, given that the investor may not tell type A loan from type B. 2) Now, after taking the securitization class, the ConnBank manager decided to join the party and issue ABS based on all of his loans. For that the banker set up a dummy corporation named ConnCorp and transferred all of its loans to the ConnCorp as its asset. What is the expected value and the estimated risk of the ConnCorp? Let's assume that the probability of default is independent between the two borrower types. 3) Now the banker got more creative and issued a following security C. C is based on one unit of A type loan and two units of type B loans. It will pay $1 to the investor unless all three borrowers default at the same time. Calculate the expected value and the risk of security C.

5. ConnBank has made two types of loans-A and B-each has the principal of $1. The probability of repayment is 0.9 and 0.6 for A loan and B loan, respectively. For the sake of simplicity, let's ignore the interest rate and interest rate margins. 1) Explain why selling its loan directly to outside investors may not work, given that the investor may not tell type A loan from type B. 2) Now, after taking the securitization class, the ConnBank manager decided to join the party and issue ABS based on all of his loans. For that the banker set up a dummy corporation named ConnCorp and transferred all of its loans to the ConnCorp as its asset. What is the expected value and the estimated risk of the ConnCorp? Let's assume that the probability of default is independent between the two borrower types. 3) Now the banker got more creative and issued a following security C. C is based on one unit of A type loan and two units of type B loans. It will pay $1 to the investor unless all three borrowers default at the same time. Calculate the expected value and the risk of security C.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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