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CA Final · Advanced Financial Management · Securitization

Kaveri Bank sells a Rs 100 crore pool of loans yielding 12% p.a. to an SPV. The pool has a weighted average residual life of 3 years and the investors require a 10% yield. Treating the net yield differential as an annuity for a simple estimate of the premium, using annual excess interest of Rs 2 crore for 3 years discounted at 10% (annuity factor 2.4869), what is the approximate present value of the excess interest, i.e., the premium the SPV can pay?

The premium is about Rs 4.97 crore. The yearly excess interest of Rs 2 crore (2% of Rs 100 crore) for three years is discounted at 10% using the annuity factor 2.4869. Simply adding up Rs 6 crore ignores time value of money.

  1. ARs 6.00 crore
  2. BRs 4.97 croreCorrect
  3. CRs 5.47 crore
  4. DRs 2.49 crore

Explanation

Excess interest = (12% - 10%) x 100 = Rs 2 crore a year. PV = 2 x 2.4869 = Rs 4.97 crore. Rs 6 crore is the undiscounted sum; Rs 2.49 crore wrongly uses the annuity factor on 1.

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