Now, suppose than instead the CMO was structured as a sequential pay security. T
ID: 2723771 • Letter: N
Question
Now, suppose than instead the CMO was structured as a sequential pay security. There is $20,000,000 of principal allotted to the A Tranche, which has a coupon rate of 3.75%, $30,000,000 of principal allotted to the B Tranche, which has a coupon rate of 4.25%, $45,000,000 of principal allotted to the Z (accrual) Tranche, which has a coupon rate of 5%. 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.
– A. What would the payments (cash flows) to the investors be in year 1 to the A tranche, B tranche, Z tranche, and the residual class when prepayment is at 10 CPR?
Explanation / Answer
Tranche A
Promised Coupon payment = 0.0375* 20,000,000 = 750,000
Prepayment = 10% of 20,000,000 = 2,000,000
Tranche B
Promised coupon payment = 0.0425 * 30,000,000 = 1,275,000
Prepayment = 10% of 30,000,000 = 3,000,000
Tranche C
Promised coupon paymetn = 0.05* 45,000,000 = 2,250,000
Prepayment = 10% of 45,000,000 = 4,500,000
The residual class deatils are not provided in the case and hence cash flow for the residual class cannot be calculated
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