Question 3 One unit investment (loan) yields a return of 10 with probability 0.6 and 2 with probability 0.4. If the bank holds the loan on its balance sheet it incurs a cost for holding capital due to capital requirements. Bank is considering securitizing its loan to overcome capital requirements. a) What is the maximum price a risk-averse buyer with E(U(R)) = R1/2 would be willing to pay for the loan issued by the bank? b) Suppose the bank can tranche the loan by creating two assets, a safe asset and a risky asset. Bank can sell such assets to two classes of investors, risk-averse (as in part a) and risk-neutral investors. Ideally, he would sell everything to risk-neutral investors, but these investors have limited funds of only 4.8. Which assets will the bank sell to the different types of investors? What will be the return for the bank