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CMA Final · Strategic Financial Management · Securitization

A finance company sells a loan pool with outstanding principal of Rs 100 crore to an SPV at a price of Rs 98 crore. The pool earns interest at 12% p.a. on the principal, and the SPV pays investors 10% p.a. on Rs 98 crore. Ignoring servicing fees and losses, what is the excess spread income for the year, as the difference between pool interest and investor interest?

Excess spread is Rs 2.20 crore. Pool interest is 12% of Rs 100 crore, which is Rs 12 crore, and investors receive 10% of Rs 98 crore, which is Rs 9.8 crore. The difference is the spread. Using the rate gap on Rs 100 crore ignores the discounted purchase price.

  1. ARs 2.00 crore
  2. BRs 2.20 croreCorrect
  3. CRs 2.40 crore
  4. DRs 1.96 crore

Explanation

Pool interest = 12% x 100 = Rs 12 crore. Investor interest = 10% x 98 = Rs 9.8 crore. Excess spread = 12 - 9.8 = Rs 2.20 crore. Rs 2.00 crore wrongly applies the rate difference of 2% to Rs 100 crore.

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