A bank grants 30 year mortgages for a total amount of 100 million. These mortage

Question

A bank grants 30 year mortgages for a total amount of 100 million.  These mortages require payments of coupons of 10% at the quarterly basis.  Consider now a 30 year Collateralied Mortgage Obligations (CMOs) using this mortgage pool as collateral.  There are three tranches with the following characteristics: Class A: Quarterly fixed coupon 9%, class size $20 million; Class B: Quarterly fixed coupon 10%, class size $30 million; Class C: Quarterly fixed coupon 11%, class size $50 million.  Assuming that there are not at any time any type of repayments, what are the total promised coupon payments to the three classes?  What are the principal payments to each of the three classes for the first year?  If over the year year there are quarterly repayments of 5 million on the mortgage pool. how are the funds distributed?

Explanation / Answer

End of Qtr Principal o/s Interest Total Prin. Repaid Balance 1.00 100.00 2.50 102.50 0.83 99.17 2.00 99.17 2.48 101.65 0.83 98.33 3.00 98.33 2.46 100.79 0.83 97.50 4.00 97.50 2.44 99.94 0.83 96.67

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