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Dear Sir,
1)In calculating the market value of a bond, if i calculate the cost of debt and it comes out to be 4.7%, can i use 5% round off in order to get the figure from present value table, or should i use 4.7%?2) Could you give me an idea on what excess spread is, in reducing the credit risk internally?
Thankyou
1. You are unlikely to lose any marks by rounding to 5%
2. It relates to securitisation. If you have given loans you are receiving interest. Securitising them is issuing debt (and so receiving money) that is secured on the loans – so the interest received from the loans is used to pay the interest on the debt issued. The interest given on the debt will be lower than the interest received on the loans (so to give some protection against any of the loans going bad), and the difference is the excess spread.
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