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1. A bank has a 5-year $10 million loan that pays annual payments of 7 percent and returns the principal at maturity. The bank can sell the loan with recourse at a price of $9 million and without recourse at a price of $8.9 million. If the probability of default (with no interest or principal being repaid) is 1.5 percent, should it sell the loan with or without recourse (assume risk neutrality)? Explain. [Note: the expected proceeds on the loan sale with recourse is the price times the probability that the loan will NOT default.]
2. Assume a bank originates a pool of short-term real estate loans worth $15 million with maturities of 5 years and with annual interest payments of 7 percent and return of principal at maturity. (These are called “balloon” loans.) If the loans are converted to pass-through securities and the bank charges 50 basis points servicing fee per year, what is the payment expected by the holders (purchasers) of the securities at the end of the first year if 10% of the mortgages are expected to be prepaid? Note: the servicing fee is based on the book value of the loans at the beginning of each year.
The annual standard deviation of return on Stock A's equity is 37 percent and the correlation coefficient of these returns, with those on a well-diversified portfolio, is 0.62. Comparable numbers of Stock B are 34 percent and 0.94. Which stock is ris..
Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called.
Discuss what a "Global Capital Market is its benefits, and main players?
Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?
On December 1, 2004, you paid $950 for a $1,000 par, 6% semiannual coupon bond. You sold the bond on December 5, 2005, for $980. The total monetary return, including both interest and capital gains, from holding this bond is closest to...?
Suppose the expected rate of inflation declines by 2% per year. Write the new equation for the Security Market Line.
The Targaryen Corporation (TTC) commits to paying a constant dividend of $3 per share each year, in perpetuity. Suppose that another investment with the same level of systematic risk as TTC’s shares has an expected return of 15%. Now assume that all ..
What is the yield on the repo if it has a 20 day maturity?
An asset used in a four-year project falls in the 5 year MACRS class for tax purposes. The asset has an acquisition cost of $6,500,000 and will be sold for $1,600,000 at the end of the project. If the tax rate is 35% what is the after tax salvage val..
What is the effective cost of mortgage? What is the monthly payment?
now assume you are in a perfect market with only corporate taxes added. cde corp. is all equity financed with 5000
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $200,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prov..
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