Imagine that you are in the position of buying loans in the secondary market (th
ID: 1116640 • Letter: I
Question
Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans made by banks) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan if: a. the borrower has been late on a number of loan payments b. interest rates in the economy as a whole have risen since the loan was made c. the er is a firm that has just declared a high level of profits d. interest rates in the economy as a whole have fallen since the loan was made.Explanation / Answer
A.
I would like to pay less because there is a risk of default or delayed payment by the borrowers. It will increase the discount rate and the present value of loans will come down. So, less payment will take place.
B.
I would like to pay less because the purchasing power of the value of the loan has fallen due to the rise in interest rates after the loans have been made. It will decrease the real value of the loan. So, less payment will take place.
C.
I would like to pay more because the borrower is a corporate client and the company has earned huge profit. It means that the company will repay the loan on time. So, higher payment will take place.
D.
I would like to pay more because the value of the loan has increased due to the falling interest rates after the loan has been made. It means that the real value of the loan has now been increased. So, higher payment will take place.