CMA Final · Strategic Financial Management · Securitization
A pool has a principal of Rs 10 crore, to be repaid in a single bullet after 2 years, with interest of 12% p.a. paid annually. The SPV issues PTCs at a discount rate of 10% p.a. What is the approximate price of the PTC pool (present value of cash flows)? Use discount factors 0.9091 (year 1) and 0.8264 (year 2).
The price is about Rs 10.347 crore. Present value of interest of Rs 1.2 crore a year is Rs 2.0826 crore, and present value of the Rs 10 crore bullet principal is Rs 8.264 crore. The sum exceeds par because the coupon of 12% is above the 10% discount rate.
- ARs 10.347 croreCorrect
- BRs 10.000 crore
- CRs 11.200 crore
- DRs 9.653 crore
Explanation
Annual interest = Rs 1.2 crore. PV of interest = 1.2 x (0.9091 + 0.8264) = 1.2 x 1.7355 = 2.0826. PV of principal = 10 x 0.8264 = 8.264. Total = 10.3466, about Rs 10.347 crore. Rs 10 crore would apply only if discount rate equalled coupon.
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