CMA Final · Strategic Financial Management · Securitization
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 years at 10% = 2.4869). Investors in a pass-through security require a yield of 12% p.a. (annuity factor for 3 years at 12% = 2.4018). Ignoring defaults, servicing costs and prepayments, the SPV can price the pool at approximately:
The annual instalment is Rs 10 crore divided by 2.4869, about Rs 4.021 crore. Discounting it at investors' 12% using 2.4018 gives about Rs 9.66 crore, a discount to par because the required yield exceeds the pool coupon.
- ARs 9.66 croreCorrect
- BRs 10.00 crore
- CRs 10.35 crore
- DRs 9.19 crore
Explanation
Annual instalment = 10 / 2.4869 = Rs 4.0211 crore. Value at 12% = 4.0211 x 2.4018 = Rs 9.658 crore, about Rs 9.66 crore. Rs 10.35 crore wrongly reverses the discount direction.
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