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CA Final · Advanced Financial Management · Securitization

A securitised pool has a principal of Rs 120 crore. The senior PTCs total Rs 100 crore, and the balance of Rs 20 crore is a subordinated tranche that absorbs losses first. During the term, credit losses on the pool amount to Rs 15 crore. How much of the subordinated cushion remains, and are the senior PTC holders fully covered?

Rs 5 crore of the subordinated cushion remains and senior holders are fully covered. Losses of Rs 15 crore fall first on the Rs 20 crore subordinated tranche, and the remaining pool value of Rs 105 crore still exceeds the Rs 100 crore owed to senior investors.

  1. ARs 5 crore remains; senior holders are fully coveredCorrect
  2. BRs 20 crore remains; senior holders are fully covered
  3. CRs 5 crore remains; senior holders suffer a loss of Rs 15 crore
  4. DRs 15 crore remains; senior holders suffer a loss of Rs 5 crore

Explanation

Pool value after losses = 120 - 15 = Rs 105 crore, which exceeds the senior claim of Rs 100 crore. The subordinated tranche absorbs the whole Rs 15 crore loss, so Rs 20 - 15 = Rs 5 crore remains. The senior tranche is untouched.

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