CA Final · Advanced Financial Management · Securitization
Kaveri Auto Finance has vehicle loans with a book value of ₹10 crore. These will yield total collections of ₹11.55 crore at the end of one year. It sells the pool to an SPV whose investors require a 10% annual yield. Ignoring all costs, what upfront gain over book value does Kaveri realise on the sale?
The upfront gain is ₹0.50 crore. The SPV pays the present value of ₹11.55 crore discounted at 10% for one year, which is ₹10.50 crore, so the excess over the ₹10 crore book value is ₹0.50 crore.
- A₹0.50 croreCorrect
- B₹1.55 crore
- C₹0.395 crore
- D₹1.05 crore
Explanation
Price = 11.55 / 1.10 = ₹10.50 crore. Gain = 10.50 - 10.00 = ₹0.50 crore. ₹1.55 crore is the undiscounted collection minus book value. ₹0.395 crore comes from wrongly multiplying by 0.90 instead of dividing by 1.10.
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