FRM Part II · FRM Exam Part II · An Introduction to Securitisation
A pool has a weighted average coupon of 7.0% on assets of USD 200 million. The notes issued have a weighted average cost of 5.0% on USD 200 million, and servicing and trustee fees are 0.5% of the pool. Ignoring losses, what is the annual excess spread available as first-line credit enhancement, in USD?
Annual excess spread is USD 3.0 million. It equals the asset yield of 7.0% less note cost of 5.0% and fees of 0.5%, giving 1.5% on a USD 200 million pool. This cash flow can absorb early losses before tranches are affected.
- AUSD 4.0 million
- BUSD 3.0 millionCorrect
- CUSD 5.0 million
- DUSD 1.0 million
Explanation
Excess spread = 7.0% − 5.0% − 0.5% = 1.5% of USD 200 million = USD 3.0 million. USD 4.0 million ignores the fees, and USD 1.0 million treats fees as 1%.
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