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CA Final · Advanced Financial Management · Securitization

Sundaram Finance Ltd pools housing loans of Rs 20 crore that carry an average interest rate of 12% p.a. It issues pass-through certificates (PTCs) to investors at a 10% p.a. coupon on the outstanding principal. Ignore servicing fees and losses. What is the annual excess spread on the opening pool balance?

The annual excess spread is Rs 40 lakh. It is the difference between the pool yield of 12% and the PTC coupon of 10%, which is 2%, applied to the Rs 20 crore pool. The figures Rs 2.40 crore and Rs 2.00 crore are gross interest receipts and investor payouts, not the spread.

  1. ARs 2.40 crore
  2. BRs 40 lakhCorrect
  3. CRs 2.00 crore
  4. DRs 4 lakh

Explanation

Excess spread equals pool yield minus investor coupon, which is 12% - 10% = 2%. Applied to Rs 20 crore this gives Rs 0.40 crore, or Rs 40 lakh. Rs 2.40 crore is the whole interest income at 12%, and Rs 2.00 crore is the investor payout at 10%; neither is the difference.

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