Question

A bank has placed 5,000 consumer loans in a package to be securitized. These loans have an annual yield of 15.25 percent. The bank estimates that the securities on these loans are priced to yield 10.95 percent. The bank's default (charge-off) rate on the pooled loans is expected to be 1.45 percent. Underwriting and advisory services will cost 0.25 percent, and a credit guarantee, if more loans default than expected, will cost 0.35 percent. What is the residual income from this loan securitization?

A. 3.70 percent

B. 4.30 percent

C. 2.25 percent

D. 5.15 percent

E. None of the options is correct

Answer

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