CMA Final · Strategic Financial Management · Securitization
A pool of housing loans of Rs 50 crore is securitised. The SPV issues senior PTCs of Rs 44 crore, subordinate (mezzanine) PTCs of Rs 4 crore and an equity tranche of Rs 2 crore. The pool is later hit by credit losses of Rs 5 crore. Assuming losses are absorbed from the lowest tranche upward, what is the loss borne by the senior PTC holders?
Senior holders bear nil. The equity tranche of Rs 2 crore absorbs the first losses, and the mezzanine tranche absorbs the remaining Rs 3 crore out of its Rs 4 crore. Total subordination of Rs 6 crore exceeds the Rs 5 crore loss, so the senior tranche is untouched.
- ARs 5 crore
- BRs 3 crore
- CRs 1 crore
- DNilCorrect
Explanation
Losses are absorbed first by the equity tranche (Rs 2 crore), leaving Rs 3 crore, then by the mezzanine tranche (Rs 4 crore), which absorbs the remaining Rs 3 crore with Rs 1 crore left. The senior tranche bears nil. Rs 1 crore is wrong because it is the unused mezzanine cushion, not a senior loss.
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 transaction, the entity that sells its loan receivables to a special purpose vehicle (SPV) so that they can be converted…
- In a pass-through securitisation, an originating bank transfers a pool of housing loans to a special purpose vehicle (SPV). Investors receiv…
- A securitised pool has a Single Monthly Mortality of 0.5% every month. The annualised prepayment rate, the Conditional Prepayment Rate (CPR)…
- An originator securitizes a pool of Rs 50 crore. The pool earns an average interest of 12% p.a. The PTCs pay investors 9% p.a. Servicing and…
- A pool of loans of Rs 120 crore is securitized. The pool has a weighted average maturity of 5 years, and the SPV pays a coupon of 10% p.a. o…
- A pool of loans has a principal of Rs 10 crore, to be repaid in equal annual instalments over 3 years at 10% p.a. (annuity factor for 3 year…