CMA Final · Strategic Financial Management · Securitization
A bank securitises a loan pool with a principal of Rs 200 crore carrying 12% interest. The SPV issues pass-through certificates at a 9% coupon, and the servicer retains a 0.5% fee on the pool. Ignoring other costs and prepayments, what is the annual excess spread (in Rs crore) available as first-line credit enhancement?
The annual excess spread is Rs 5 crore. Pool interest of 12% on Rs 200 crore is Rs 24 crore; investors receive 9%, or Rs 18 crore, and the servicer takes 0.5%, or Rs 1 crore. The remainder of Rs 5 crore acts as first-line credit enhancement.
- ARs 5 croreCorrect
- BRs 6 crore
- CRs 7 crore
- DRs 4 crore
Explanation
Pool interest = 12% of 200 = Rs 24 crore. Certificate coupon = 9% of 200 = Rs 18 crore. Servicing fee = 0.5% of 200 = Rs 1 crore. Excess spread = 24 - 18 - 1 = Rs 5 crore. Rs 6 crore ignores the servicing fee.
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