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CA Final · Advanced Financial Management · Securitization

Kaveri Finance sells a loan pool with book value Rs 100 lakh to an SPV. The SPV will pay investors Rs 40 lakh at the end of each of the next 3 years. Investors require a 9% yield, and the 3-year annuity factor at 9% is 2.5313. Ignoring costs and taxes, what is the pool's price to the SPV and the originator's gain or loss on sale (to the nearest Rs 0.01 lakh)?

The price is Rs 101.25 lakh and the originator gains Rs 1.25 lakh. Discounting Rs 40 lakh for three years at 9% gives 40 x 2.5313, or about Rs 101.25 lakh, which exceeds the book value of Rs 100 lakh. Using undiscounted Rs 120 lakh overstates the gain.

  1. APrice Rs 101.25 lakh; gain Rs 1.25 lakhCorrect
  2. BPrice Rs 120.00 lakh; gain Rs 20.00 lakh
  3. CPrice Rs 101.25 lakh; loss Rs 1.25 lakh
  4. DPrice Rs 98.75 lakh; gain Rs 1.25 lakh

Explanation

Price = 40 x 2.5313 = Rs 101.25 lakh (101.252). Gain = 101.25 - 100 = Rs 1.25 lakh. Rs 120 lakh adds the cash flows without discounting. Calling it a loss reverses the sign of the difference between price and book value.

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