Consider the following facts:

a. You create a $100,000,000 loan pool. Borrowers are paying 10% interest on the loans. Each loan is 10 years paying interest only (no amortization) b. You sell tranches in the pool as follows: i. 55% of the pool is rated AAA paying 7.5% to the buyer ii. 15% of the pool is rated AA paying 8.0% to the buyer iii. 10% of the pool is rated A paying 9.0% to teh buyer iv. 7% of the pool is rated BBB paying 10% to the buyer v. 6% of the pool is rated BB paying 12% to the buyer vi. 4% of the pool is rated B paying 14% to the buyer vii. 3% of the pool is unrated paying 16% to the buyer

1) How much money is made in each year from the differential between what you collect from the borrower and what you pay to the buyers of the tranches 2) How much is the weighted average interest rate from the sale of the tranches? 3) How much is your NPV profit from the sale of all of the tranches if you discount the profits at the weighted average rate? 4) How much is your profit if you do not discount the profits each year? 5) Name a risk and a benefit to purchasing the unrated tranche. 6) Name one risk and one benefit to purchasing the AAA tranche.