Answer: EUR 2,544,000

The value of the overcollateralization account at the end of year 2 is determined by considering the compounded value of the overcollateralization account from the previous year, the recovered principal amount from defaults in the current year, and the maximum annual amount that can flow into the overcollateralization account from the excess spread. In this scenario, the overcollateralization account (OC) at the end of year 1 is depleted because the calculated amount to be transferred from the excess spread is negative. This is calculated as follows: \[ \text{Excess Spread Transfer} = \text{Min}[(0.035 + 0.022) \times 100 \times 1,000,000 - 6,300,000; 1,500,000] = -600,000 \] Since the excess spread transfer is negative, it indicates that there is not enough excess spread to fund the overcollateralization account, and it is depleted at the end of year 1. For year 2, with 8 defaults occurring, the calculation of the overcollateralization account (OC2) includes the recovered principal amount (R2) from these defaults. The principal amount of each loan is EUR 1,000,000, and the recovery rate is 45%. Therefore, the recovered principal amount from the 8 defaults is: \[ R2 = 8 \times 1,000,000 \times 0.45 = 3,600,000 \] However, since the overcollateralization account was depleted at the end of year 1, the value of OC2 at the end of year 2 would be solely the recovered principal amount from the defaults, which is EUR 3,600,000. This aligns with option D, which is the correct answer. It is important to note that the calculation does not include the compounded year-1 value of the OC because it was depleted, and the maximum annual amount flowing from the excess spread into the overcollateralization account is not considered because the account was already depleted before year 2. The focus is on the recovered principal amount from the defaults in year 2.

Author: LeetQuiz Editorial Team