Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond. Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds. Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Question

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Answer 1

Question

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

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Students have asked these similar questions

Consider a call option on a stock that does not pay dividends. The stock price is $100 per share, and the risk-free interest rate is 10%. The call strike is $100 (at the money). The stock moves randomly with u=2 and d=0.5. 1. Write the system of equations to replicate the option using A shares and B bonds. 2. Solve the system of equations and determine the number of shares and the number of bonds needed to replicate the option. Show your answer with 4 decimal places (x.xxxx); do not round intermediate calculations. This is easy to do in Excel. A = B = 3. Use A shares and B bonds from the prior question to calculate the premium on the option. Again, do not round intermediate calculations and show your answer with 4 decimal places. Call premium =

Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer. Show your work to receive credit. 6. What is the premium of a call with a higher strike. Show your work to receive credit; do not round intermediate calculations. S0 = $100, u=2, d=0.5, r=10%, strike=$150

Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer.

Answer 2

Question

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

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Answer 3

Question

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

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Answer 4

Question

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

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Answer 5

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

Answer 6

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

Answer 7

Chapter 10, Problem 16P

To determine

Concept Introduction:

Bonds: It is a type of promise or contract to pay in the future with certain limitations and conditions specified at the time of issuing the bond.

Securitization: It is generally a type of pooling under which the loan taken by an individual is pooled and later on it is sold in the form of bonds.

Recession: Every economy has some business cycle. It is one of the business cycle in which there is an excess amount of goods supplied but the demand is very low. During a recession, unemployment is very high.

Answer 8

Expert Solution & Answer

Answer to Problem 16P

a. Securitization

The process is called securitization. It leads to diversification and provide liquidity.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

When Mae packages individual students’ loans into pools of loans and sells shares of these pools to investors, then this process is called securitization.

The effects of securitization are that it helps in the greater diversification of portfolios for an investor comparative to the situation when they could only buy and sell individual student loans.

It also provides liquidity as the bond is very flexible as it can be sold and bought any time.

b. Effects on the Accessibility of Loans

The ability of students to get loans will increase due to a fall in interest rates.

Mae action will have positive effect on the ability of students to get loans. This will certainly help students in getting loans at lower interest rates because investors are ready to provide funds for students as compared to the situation when there is only an individual loan available.

c. Loans during Recession

Recession adversely affects the availability of the loan and profit to investors during the time of recession.

During severe recession, many graduating students become unemployed and default on their student loans. Default by many students led to a rise in interest rates on the bond in order to attract investors.

Investors now believe that Mae bond is riskier than the earlier. It is because the interest rate has increased to attract them to buy the bond which makes the investor expect the same situation in the future and make them worse.

The availability of the loan during recession would certainly decrease. During recession there is a huge unemployment due to which students will not be able to get jobs and repay their loans.

Answer 12

Ch. 10.A - Prob. 1P Ch. 10.A - Prob. 2P Ch. 10.A - Prob. 3P Ch. 10 - Prob. 1QFT Ch. 10 - Prob. 2QFT Ch. 10 - Prob. 3QFT Ch. 10 - Prob. 1P Ch. 10 - Prob. 2P Ch. 10 - Prob. 3P Ch. 10 - Prob. 4P

Answer to Problem 16P

Explanation of Solution

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Chapter 10 Solutions