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The coupon rate promised to investors on securities issued against a pool of loans is 6.5%. The default rate on the pool of loans is
The coupon rate promised to investors on securities issued against a pool of loans is 6.5%. The default rate on the pool of loans is expected to be 3.5%. The fee to compensate a servicing institution for collecting payments on the loan is 2%. Fees to set up credit and liquidity enhancements are 5%. The residual income on this pool of loans is 7%. What is the expected yield on this pool of loans?
The Answer: 24%. How did we end up with this number? (Show all steps)
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