This question is based on the following CMO: -100 residential loans, average sta
ID: 2490872 • Letter: T
Question
This question is based on the following CMO:
-100 residential loans, average starting loan balance $250,000
-10 year FRMs with annual payments, WAC 4.25%
-Assume 0 prepayment
Now, suppose than instead the CMO was structured as a sequential pay security. There is $5,000,000
of principal allotted to the A Tranche, which has a coupon rate of 3.00%, $7,500,000 of principal
allotted to the B Tranche, which has a coupon rate of 3.75%, $10,500,000 of principal allotted to
the Z (accrual) Tranche, which has a coupon rate of 4.25%. The issuer (residual) will receive cash
flows after payment rules to other classes are satisfied.
The payment rules are as follows:
Priority payments will be made to the A tranche and the A class will be first to receive their promised coupon payment.
The B class will receive interest payments only until the A class is repaid. In addition to interest, A will receive priority
payments toward principal in the amount of sum of principal repayment by the pool and the interest accrued to Z in that
period. After A is repaid, B then will receive priority payments of amortization and accrued interest according the same
rules as A. The Z class will accrue interest until both A and B are repaid. Z will receive current interest and principal
payments at that time according to the same rules as A and B. All cash flows from the pool that are not designated by the
above rules will go to the residual class in that period.
CFs to pool:
Time (in years)
Start Balance
Payment
Interest
Principal
End Balance
1
$25,000,000.00
$3,120,753.04
1,062,500.00
$2,058,253.04
$22,941,746.96
2
22,941,746.96
$3,120,753.04
975,024.25
$2,145,728.80
$20,796,018.16
3
20,796,018.16
$3,120,753.04
883,830.77
$2,236,922.27
$18,559,095.89
4
18,559,095.89
$3,120,753.04
788,761.58
$2,331,991.47
$16,227,104.42
5
16,227,104.42
$3,120,753.04
689,651.94
$2,431,101.11
$13,796,003.31
6
13,796,003.31
$3,120,753.04
586,330.14
$2,534,422.90
$11,261,580.41
7
11,261,580.41
$3,120,753.04
478,617.17
$2,642,135.88
$8,619,444.53
8
8,619,444.53
$3,120,753.04
366,326.39
$2,754,426.65
$5,865,017.88
9
5,865,017.88
$3,120,753.04
249,263.26
$2,871,489.78
$2,993,528.10
10
2,993,528.10
$3,120,753.04
127,224.94
$2,993,528.10
$0.00
What is the balance of class A at the end of year 1?
What is the balance of class B at the end of year 1?
What is the balance of class Z at the end of year 1?
What is the IRR to the residual class, given the information in the chart below?
Cash flows to residual class:
T=0 ????
T=1 ????
T=2 153,693.71
T=3 121,922.76
T=4 108,313.21
T=5 94,125.26
T=6 85,000.00
T=7 85,000.00
T=8 85,000.00
T=9 85,000.00
T=10 2,085,000.00
What is maturity of the A tranche given no prepayment? State your answer in number of years. What is the total sum of cash flows paid to class A (total principal and interest over lifespan of security).
Time (in years)
Start Balance
Payment
Interest
Principal
End Balance
1
$25,000,000.00
$3,120,753.04
1,062,500.00
$2,058,253.04
$22,941,746.96
2
22,941,746.96
$3,120,753.04
975,024.25
$2,145,728.80
$20,796,018.16
3
20,796,018.16
$3,120,753.04
883,830.77
$2,236,922.27
$18,559,095.89
4
18,559,095.89
$3,120,753.04
788,761.58
$2,331,991.47
$16,227,104.42
5
16,227,104.42
$3,120,753.04
689,651.94
$2,431,101.11
$13,796,003.31
6
13,796,003.31
$3,120,753.04
586,330.14
$2,534,422.90
$11,261,580.41
7
11,261,580.41
$3,120,753.04
478,617.17
$2,642,135.88
$8,619,444.53
8
8,619,444.53
$3,120,753.04
366,326.39
$2,754,426.65
$5,865,017.88
9
5,865,017.88
$3,120,753.04
249,263.26
$2,871,489.78
$2,993,528.10
10
2,993,528.10
$3,120,753.04
127,224.94
$2,993,528.10
$0.00
Explanation / Answer
IRR = PV Factor = Initial investment / Average Cash inflow Total Cash inflow =2803054.94 Average inflow = 2803054.94/9 =311450.55 Initial investment of tranche A = $50,000,000 Tranche A PV Factor = $ 50,000,000/ $ 311450.55 = 16.5 The PV factor of 16.05 is to be located in the annuity Table This falls in the 20%
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