CA Final · Advanced Financial Management · Securitization
Kaveri Finance (originator) securitizes a pool of loans with principal outstanding of ₹50 crore. It sells the pool to an SPV at par. The SPV issues Pass Through Certificates (PTCs) of ₹45 crore to investors and the balance is retained by Kaveri Finance as a subordinated first-loss tranche. What percentage of the pool is the retained credit enhancement?
The retained credit enhancement is 10%. The pool is ₹50 crore and investors fund ₹45 crore, leaving ₹5 crore subordinated with the originator. Dividing the retained ₹5 crore by the pool of ₹50 crore gives 10%.
- A10%Correct
- B9%
- C11.11%
- D5%
Explanation
Retained portion = 50 - 45 = ₹5 crore. As a percentage of the pool = 5/50 = 10%. The 11.11% distractor wrongly uses 5/45 (investor tranche as base), and 9% wrongly uses 45/50 reversed to 100-91.
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