Please ans E Question 4Bank issues two loans. Each loan yields a return R with probability p and O otherwise. Probabilitiesof success of individual loans are independently and identically distributed (i.i.d.).The bank finances the loan with equity (k) and debt (d). Debt has a net cost of 0 (bank debtorsbreak-even in expectation). Equity is costly, where 1 unit of bank equity costs c>1.a) Suppose the keeps the loans on its balance sheet. What is the expected profit that the bankmakes?Expected return from each loan is pR. For each loan, bank needs to hold equity k and d=1-k, wherethe cost of equity is ck.Expected profit = 2pR – 2(1-k) – 2ck = 2pR - 2-2k(c-1).For the rest, suppose that R = 4, p = 0.5, k= 0.5 and c= 2.5b) What is the expected profit of the bank in this case from holding the two loans on its balancesheet?c) Suppose the bank wants to avoid capital costs and securitizes the two loans. Bank sells the loansindividually to risk-averse investors with utility functions U(R) = R. What is the revenue that thebank would get if it sold 2 loans to two risk-averse investors?d) Bank can pool the two loans and create two securities by splitting equally the claims on the cashflows. What is the maximum price the risk-averse investors would be willing to pay for such asecurity and would the bank be willing to pool and sell the loans?e) What happens when the bank issues N loans with N0 and each investor acquires a share of1/N in the loan portfolio?

The term loan alludes to a sort of credit vehicle where an amount of cash is loaned to one more…

Answered: e) What happens when the bank issues N…

e) What happens when the bank issues N loans with N0 and each investor acquires a share of 1/N in the loan portfolio?

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

Similar questions

may I also recieve help with iv to vi?
EGR 116 Project 2 Controlling Motor Speed - Word Mason B. Wohlfeil sign Layout References Mailings Review View O Tell me what you want to do Help - A A Aa- A E-E'E- E AaBbCcDdE AAB6CCL AaBbC AaBbCcI AaBbCc] AaBbCcC AaB AaBb- x' A - ay - A- 1 Caption Emphasis Heading 1 1 Normal Strong Subtitle Title 1 No Sp nt Paragraph Styles TUse the table below to answer the following questions. Assume that fixed costs are $100 and labor is paid $80 per unit (employee). MP AP FC VC TC ATC AVC AFC MC 1 15 3 25 4 40 5 45 6 48 7 50 Complete the table. a) Graph ATC, AVC, AFC, and MC. w] lyp
PLS HELP ASAP ON BOTH
Whats a problem customers face with LCD Panels Battery issues?
What the impact Covid19 in small business?
How about 5-7?
What is demend?
What’s a life worth dealing with the EPA? Describe in detail