CA Final · Advanced Financial Management · Securitization
A bank securitises a pool of Rs 10 crore of loans repayable in 5 equal annual instalments (paid at each year end) at an interest rate of 10% p.a. The 5-year annuity factor at 10% is 3.7908. What is the principal component of the first annual instalment, to the nearest Rs 0.001 crore?
The principal component of the first instalment is Rs 1.638 crore. The level instalment is 10 crore divided by 3.7908, which is Rs 2.638 crore. First-year interest of Rs 1 crore is deducted from it. Straight-line repayment of Rs 2 crore ignores the annuity structure.
- ARs 2.000 crore
- BRs 1.000 crore
- CRs 2.638 crore
- DRs 1.638 croreCorrect
Explanation
Instalment = 10 / 3.7908 = Rs 2.638 crore. First-year interest is 10% of 10 = Rs 1.000 crore. Principal is 2.638 - 1.000 = Rs 1.638 crore. Rs 2.638 crore is the total instalment, and Rs 2.000 crore wrongly assumes straight-line repayment.
Did you get it right without looking?
One question tells you little. A timed set on Securitization shows your real accuracy, how long you take and where you lose marks.
More Securitization questions
- In a securitization, the investors' securities are structured into senior and subordinated tranches so that the first losses on the pool are…
- Meru Housing Finance securitises a pool of loans with principal Rs 50 crore, weighted average interest 11% p.a., to an SPV. The SPV issues P…
- Kaveri Finance sells a loan pool with book value Rs 100 lakh to an SPV. The SPV will pay investors Rs 40 lakh at the end of each of the next…
- Sundaram Finance Ltd pools housing loans of Rs 20 crore that carry an average interest rate of 12% p.a. It issues pass-through certificates …
- Kaveri Bank sells to an SPV a pool of receivables that pays Rs 40 lakh at the end of each of the next 3 years. The pool's original contractu…
- Orchid Finance sells receivables of Rs 50 crore to an SPV for Rs 46 crore cash, with excess spread flowing back to Orchid. The pool yields 1…