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How can F5 possibly be profitable?
According to the forecasts, annual default rate of 9.49 annually, applied over 5 years gives a loan default rate of 47.5%. The hazard curve then suggests So 24% default against 30% interest in the 1st year.
2nd year and onwards, a severely eroded premium base (even without early repays) , so fall short of recouping default losses through remaining cashflows.
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Originally Posted by leesal
How can F5 possibly be profitable?
According to the forecasts, annual default rate of 9.49 annually, applied over 5 years gives a loan default rate of 47.5%. The hazard curve then suggests So 24% default against 30% interest in the 1st year.
2nd year and onwards, a severely eroded premium base (even without early repays) , so fall short of recouping default losses through remaining cashflows.
Simplified example in round numbers ignoring repayments and arrears. Say you invested $100k (fully diversified). After one year you would expect 10 to have gone bad and 90 to have paid interest at 30% ($27k) so you would be up $17k before fees and tax and arrears. The next year the same %'s apply but to a lower base so the return would be the same. Personally I think there is better value in the other grades. It's not just the expected return but also the variability that matters.
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Originally Posted by leesal
How can F5 possibly be profitable?
According to the forecasts, annual default rate of 9.49 annually, applied over 5 years gives a loan default rate of 47.5%. The hazard curve then suggests So 24% default against 30% interest in the 1st year.
2nd year and onwards, a severely eroded premium base (even without early repays) , so fall short of recouping default losses through remaining cashflows.
Assuming it takes 6 months for the default to register, ie it goes 6 months without it paying you anything, then its defaulted.
Then for year 1, on average...
90.5% of the time you collect a full years interest. 9.5% of the time, you collect sum or no interest (average would be 3 months interest i think).
Year 2, you have got a little bit of capital back, maybe the loans 90% of its original value. so again, 90.5% of the time, you get a full years interest (obv less than year 1), 9.5% of the time it defaults, and you get not as much interest back
Extrapolate this out over a sample of F's, and its profitable.
Model a 30% interest rate on a $100 loan, you only need to last 31 months (out of 60) to get all your $100 back (in nominal terms).
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