CMA Final · Strategic Financial Management · Securitization
A pool of Rs 20 crore of receivables is securitised. Senior PTCs of Rs 16 crore are issued and the remaining Rs 4 crore is a subordinated tranche retained by the originator. Pool losses of Rs 2.5 crore occur. Assuming losses are absorbed first by the subordinated tranche, what is the loss borne by the senior PTCs (in Rs crore)?
The senior PTCs bear no loss. The Rs 4 crore subordinated tranche absorbs losses first, and the Rs 2.5 crore loss is within that cushion, leaving Rs 1.5 crore of credit enhancement still unused.
- A2.5
- B0Correct
- C1.5
- D4.0
Explanation
The subordinated tranche of Rs 4 crore absorbs losses first. Losses of Rs 2.5 crore are fewer than Rs 4 crore, so they are fully absorbed, leaving Rs 1.5 crore of the subordinated tranche and zero loss for the seniors. Rs 1.5 crore is just the remaining subordinate cushion.
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