1. Business
  2. Economics
  3. question b1 use the following information to answer the questions...

Question: question b1 use the following information to answer the questions...

Question details

Question B1 Use the following information to answer the questions Subprime XYZ, was a pool of 2,393 mortgages with a total face value of $430 million. (15 marks) A so-called special-purpose vehicle... would purchase the mortgages. ...The S.P.V would finance itself by selling [triple-A rated] bonds. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. ...The secret sauce is that the S.P.V. would float... classes of bonds, from triple-A to a lowly Ba1 Losses on the pool were now estimated at 14 percent to 16 percent-three times the original estimate. ... (Roger Lowenstein, Triple-A Failure, NYT, 27.04.2008) Assume that the $430 million face value were used to create the following tranches Bond Rating Amount in Allocation in % Risk weights for CAR million S 215 S 129 S 43 S 8.6 8.6 4.3 $ 4.3 $ 4.3 of the 50% 30% 10% 2% 2% 1% 1% 1% 0% 2% 1% APRA APS 120 20% 20% 20% 20% 50% 50% 50% 100% 100% 100% 150% Aaa Aa1 Aa2 Aa3 A1 A2 АЗ Baa1 S 0 S 8.6 4.3 Baa3 a) Rainy Bank and Sunshine Bank invested in some of the above tranches Calculate each banks risk weighted assets and evaluate if the capital stocks were large enough to meet the 10.5 percent capital adequacy ratio requirement at the time of the initial purchase (6 marks)
Rainy Bank (in million) Assets Cash XYZ Aaa tranche XYZ A1 tranche XYZ A2 tranche XYZ A3 tranche Loans (risk weight 100%) $14 Demand deposits $10 Equity Liabilities and Equity $100 $10 $4 $4 $4 $70 Sunshine Bank (in million) Assets Cash XYZ Aaa tranche XYZ Aa2 tranche XYZ Baa3 tranche Loans (risk weight 100%) $8Demand deposits $20 Equity $10 Liabilities and Equity $102 $8 $2 $70 b) Calculate the loss of each bank for the case that 15 percent of the Subprime XYZ loan pool is written off. Which bank is in more trouble? (4 marks) c) Calculate the loss of each bank for the case that only 4 percent of the Subprime XYZ loan pool is written off. Which bank is in more trouble? (2 marks) d) Use your results from a), b), and c) to comment on the difficulty of evaluating risk in the banking sector (3 marks)
Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution