Finally, imagine that $10,000,000 of this CMO was set aside to form floater and

Question

Finally, imagine that $10,000,000 of this CMO was set aside to form floater and inverse floater securities that will generate payments based on the WAC 5% on the pool at origination. If the payment rule to the floater class is LIBOR+60bp and $6 million is the principal balance allocated to the floater class, answer the following questions:

A.What is the maximum cap rate on the floater class?

B. If LIBOR is currently at 3%, what is the payment to the inverse floater class?

C. If LIBOR is currently at 10%, what is the payment to the floater class?

Explanation / Answer

Part A

Maximum cap rate is equal to inverse floater class rate. Therefore, it would be 5%.

Part B

Payment to inverse floater class is fixed at 5%. Therefore annual payment would be:

Annual payment = 10,000,000 x 5%

                                = 500,000

Part C)

Since CAP is 5%, Interest rate cannot increase to 10%. So it will remain at 5%.

Annual payment = 10,000,000 x 5%

                                = 500,000

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