The value of any investment is always dependent on the price that one pays for it. An example of how this would apply to sub prime lending. Let's assume that there was a marketplace where an individual could buy a single sub prime loan rather than a pool of loans. The face amount of the loan is $ 200,000 and the coupon just reset to 9.5%. You buy the sub prime loan from a distressed investor at 75 cents on the dollar. The best case outcome is that the homeowner continues to pay every month and you hold the loan until maturity or sell it at 100 cents on the dollar once the market stabilizes. The worst case scenario is that the homeowner does not pay and then you seize the house as collateral. The assumption here is that the property value will cover the loan that you payed 75 cents on the dollar. The best case scenario your yield to maturity is probably over 30%. The worst case scenario you own the house and can sell it at over what you paid for the loan.
Edit Metric
History
Bookmark
