You are an investor who has bought the B piece of a CMBS deal that has 10% credi

Question

You are an investor who has bought the B piece of a CMBS deal that has 10% credit support. The pool is comprised of 20 IO loans, each with a balance of $1,000,000 and an interest rate of 5% that are all maturing in 1 year. The loans make annual payments at the end of the year. The coupon on the senior class is 3% and the coupon on the junior class is 5%. If 6 of the 20 loans default, and the recovery rate (proceeds from the foreclosure sale) on each loan that defaults is 50%, what will be the cash flow to the junior class at the end of year 1?

A. -$4,000,000

B. $0

C. $600,000

D. $2,000,000

E. $2,100,000

Tranche Principal Rate A: $5M 5%

B: $10M 6%

C: $20M 8%

Explanation / Answer

d)$2,000,000

Explanation:

Cash flow =  $1,000,000 / 0.50 (recovery rate )

=$2,000,000

Tranche Principal Rate A=

C: $20M 8%

Explanation:

20 loan default; each loan have $1,000,000 * 20 defaulters =$20,000,000

5% for junior class + 3% for senior class= 8%

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