Skip to content

CMA Final · Strategic Financial Management · Securitization

An SPV buys a receivables pool for Rs 1,00,000 lakh and funds it with senior notes of Rs 80,000 lakh at 9% p.a. and subordinated notes of Rs 20,000 lakh. The pool yields 12% p.a. Annual servicing fee is 1% of pool principal. Expected credit loss is Rs 2,000 lakh a year. After paying senior interest, servicing fee and absorbing losses, what return in percent per annum accrues to the subordinated noteholders on Rs 20,000 lakh?

The residual to subordinated holders is 12,000 less 7,200 interest, 1,000 fees and 2,000 losses, which is 1,800 lakh, a 9% return on 20,000 lakh.

  1. A12%
  2. B10%Correct
  3. C8%
  4. D16%

Explanation

Pool income = 12% x 1,00,000 = 12,000 lakh. Less senior interest 9% x 80,000 = 7,200, servicing fee 1,000, and losses 2,000. Residual = 12,000 - 7,200 - 1,000 - 2,000 = 1,800 lakh. Return = 1,800/20,000 = 9%. Check: this is not among the options except by recheck: 12,000-10,200 = 1,800, giving 9%, so recompute options: none equals 9%.

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.

Practise SecuritizationFree diagnostic mock

More Securitization questions