CMA Final · Strategic Financial Management · Securitization
Bharat Finserve securitizes a pool of auto loans with a principal outstanding of Rs 50 crore. The SPV issues Senior tranche of Rs 40 crore and Junior (equity) tranche of Rs 10 crore. The pool actually recovers Rs 44 crore of principal. Losses are absorbed first by the Junior tranche. What is the principal loss borne by the Junior tranche?
The pool loses Rs 6 crore (50 minus 44). Because the Junior tranche absorbs first losses and is Rs 10 crore in size, it bears the entire Rs 6 crore loss, while the Senior tranche remains fully protected and paid.
- ARs 6 croreCorrect
- BRs 4 crore
- CRs 10 crore
- DRs 2 crore
Explanation
Pool loss = 50 - 44 = Rs 6 crore. The Junior tranche of Rs 10 crore absorbs the first losses, so it bears Rs 6 crore, leaving Rs 4 crore recovered for it. The Senior tranche is fully repaid at Rs 40 crore. Rs 4 crore is the Junior recovery, not the loss.
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