Explore BrainMass
Share

Explore BrainMass

    Pay-Through Securities

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    The African Development Bank (ADB) wants to securitize $500 million of its loans (with the weighted average interest rate of LIBOR plus 185 basis points) in the form of pay-through securities. Class A bonds account for 80% of the total bonds and they are assigned AA rating and sold at LIBOR plus 40 basis points. Class B bonds account for 15% of the total bonds and assigned BBB rating and sold at LIBOR plus 230 basis points. The rest, Class C bonds, are unrated and bought back by ADB. If we assume all the $500 million ADB loans are paid back fully by its borrowers in Africa, what would be the return for ADB on its Class C bond investment?

    © BrainMass Inc. brainmass.com October 10, 2019, 7:29 am ad1c9bdddf
    https://brainmass.com/economics/bonds/pay-through-securities-583502

    Solution Preview

    The trick is to figure how much is left to Class C after payment of the interests to Class A and Class B.

    Total return = LIBOR + 185 bps

    Weight of Class C = 100% ...

    Solution Summary

    This solution contains brief calculations to compute the return for the different tranches of a securitized loan given that the group was fully paid are given. All steps and workings are shown.

    $2.19