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CA Final · Advanced Financial Management · Securitization

Meridian Bank sells a pool of housing loans of Rs 200 crore carrying interest at 11% p.a. to an SPV. The SPV issues pass-through certificates of Rs 200 crore at a 9% yield. Meridian continues to collect the instalments and charges a servicing fee of 0.5% p.a. on the outstanding pool. Ignoring other costs, what is the annual excess spread available to the SPV in the first year, on the outstanding balance of Rs 200 crore, after paying investors and the servicer?

The excess spread is Rs 3 crore. Interest on the pool is Rs 22 crore at 11%, investors receive Rs 18 crore at 9%, and the servicer is paid Rs 1 crore at 0.5%. Subtracting both payments leaves Rs 3 crore available as excess spread.

  1. ARs 4.00 crore
  2. BRs 3.00 croreCorrect
  3. CRs 5.00 crore
  4. DRs 2.00 crore

Explanation

Interest collected = 11% of 200 = Rs 22 crore. Investor payout = 9% of 200 = Rs 18 crore. Servicing fee = 0.5% of 200 = Rs 1 crore. Excess spread = 22 - 18 - 1 = Rs 3 crore. Rs 4 crore ignores the servicing fee.

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