1. Construct a 30-year CMO using this mortgage pool as collateral (Coupon paid q

Question

1. Construct a 30-year CMO using this mortgage pool as collateral (Coupon paid quarterly). There are 3 tranches:

A: $50 million with 8% coupon (least protection from prepayment risk)

B: $100 million with 9% coupon

C: $50 million with 10% coupon (most protection from prepayment risk)

What are the promised coupon payments to each of the classes during the first quarter? What is the total interest payment due?

2. If the trustee received a payment of $4,834,796, how would the payment be applied?

3. Assume that for the first year the trustee receives quarterly payments each of $8 million. Show how each of these payments is distributed (Create a table showing each class for four quarters)

Explanation / Answer

Answer-1

                              Tranche A        Tranche B         Tranche C         Total Issue

Principal amount   $50 million      $100 million     $50 million      $200 million

Interest rate                8 percent            9 percent      10 percent         9 percent

Quarterly interest

on initial balance     $1,000,000      $2,250,000      $1,250,000       $4,500,000

Quarter balance fixed payment interest payment principle payment remainimg principle 1 200,000,000 4,834,796 4,500,000 334,796 199,665,204 2 199,665,204 4,834,796 4,492,467 342,329 199,322,875 3 199,322,875 4,834,796 4,484,765 350,031 198,972,844 4 198,972,844 4,834,796 4,476,889 357,907 198,614,937

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