CA Final · Advanced Financial Management · Securitization
An SPV holds a loan pool of Rs 100 crore earning 11% p.a. It funds the pool with a senior tranche of Rs 70 crore at 8%, a mezzanine tranche of Rs 20 crore at 10%, and an equity (residual) tranche of Rs 10 crore. Ignoring fees and defaults, what is the annual return to the equity tranche?
The equity tranche earns 34% a year. Pool interest of Rs 11 crore less Rs 5.6 crore to the senior tranche and Rs 2 crore to the mezzanine tranche leaves Rs 3.4 crore, which is 34% of the Rs 10 crore equity invested.
- A34%Correct
- B3.4%
- C11%
- D25.6%
Explanation
Pool interest = Rs 11 crore. Senior interest = 70 x 8% = Rs 5.6 crore, and mezzanine interest = 20 x 10% = Rs 2.0 crore. Residual = 11 - 7.6 = Rs 3.4 crore. Return on equity = 3.4/10 = 34%. Using 3.4 as a percentage ignores the Rs 10 crore base.
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