Use the following information for questions
Suppose that the Third United Bank has originated a portfolio of loans.The bank knows that the aggregate payoff on this portfolio call this portfolio S will be $1,000 with probability 0.7 and $400 with probability 0.3.However, investors are unable to distinguish portfolio S from portfolio R.Portfolio R has an aggregate payoff of $1,000 with probability 0.5 and $400 with probability 0.5.Nevertheless, the investors believe that there is a 0.5 probability that the portfolio is S.The cost of communicating the true value of the portfolio is $75.If the bank keeps the portfolio on the books, its net profit is 7% of the true value minus a fixed cost of
$25.The bank's net profit from origination and servicing is 4% of the value of the securitized portfolio.Everybody is risk-neutral.
-Whata.is the bank's net profit from funding the loans and keeping them on the books?
A)$56.00
B)$40.88
C)$32.40
D)$28.60
E)$25.76

Question

Use the following information for questions 
Suppose that the Third United Bank has originated a portfolio of loans.The bank knows that the aggregate payoff on this portfolio call this portfolio S will be $1,000 with probability 0.7 and $400 with probability 0.3.However, investors are unable to distinguish portfolio S from portfolio R.Portfolio R has an aggregate payoff of $1,000 with probability 0.5 and $400 with probability 0.5.Nevertheless, the investors believe that there is a 0.5 probability that the portfolio is S.The cost of communicating the true value of the portfolio is $75.If the bank keeps the portfolio on the books, its net profit is 7% of the true value minus a fixed cost of
$25.The bank's net profit from origination and servicing is 4% of the value of the securitized portfolio.Everybody is risk-neutral.
-Whata.is the bank's net profit from funding the loans and keeping them on the books? 
A)$56.00
B)$40.88
C)$32.40
D)$28.60
E)$25.76

Quizplus · Accepted Answer

The bank's expected payoff from the portfolio is calculated as follows: (0.7 * $1,000) + (0.3 * $400) = $700 + $120 = $820. The net profit from keeping the loans on the books is 7% of the true value minus a fixed cost of $25, so: (0.07 * $820) - $25 = $57.4 - $25 = $32.40.

Use the Following Information for Questions