Suppose you have the following information for an auto loan ABS. Using the infor

Question

Suppose you have the following information for an auto loan ABS. Using the information in the bulleted list below, find a. The weighted average life for the pool, Tranche A and Tranche B b. Using a B rate =5%, what is the value of the excess servicing?

• Total loan pool = $2,000,000

• Term = 4 years

• (Weighted average) Loan rate = 3.5%; market yield =3.5%

• Servicing cost =1.50%

• PD=20%; LGD=40%; $40,000 buffer over expected loss for B tranche

1. You need to determine the size of Tranche B (Hint: PDxLGDx Loan pool + buffer)

2. Tranche A = Total Loan Pool – Tranche B

• A tranche rate =1.00%

Explanation / Answer

LGD is expected loss in case default happens

Expected loss = Pool Size x Probability of Default (PD) x Loss Given Default (LGD)

= 2,000,000 x 20% x 40%

=$ 160,000

Size of Tranche B = Expected loss + buffer of $40,000 = $160,000+$40,000 = $200,000

Size of Tranche A = Total Loan Pool – Tranche B = $2,000,000 -$200,000 = $1,800,000

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