The MM Mortgage Company is issuing a CMO with three tranches. The A tranche will
ID: 2798635 • Letter: T
Question
The MM Mortgage Company is issuing a CMO with three tranches. The A tranche will consist of $50,000 with a coupon of 7%. The B tranche will be issued with a coupon of 8% and a principal of $25,000. The Z tranche will carry a coupon of 10% with a principal of $60,000. The mortgages backing the security issue were originated at a fixed rate of 10% with a maturity of 10 years (annual payments). The issue will be overcollateralized by $5,000, and the issuer will receive all net cash flows after priority payments are made to each class of securities. Priority payments will be made to the class A tranche and will include the promised coupon, all amortization from the mortgage pool, and interest that will be accrued to the Z class until the principal of $50,000 due to the A tranche is repaid. The B class securities will receive interest-only payments until the A class is repaid, and then will receive priority payments of amortization and accrued interest. The Z class will accrue interest at 10% until both A and B classes are repaid. It will receive current interest and principal payments at that time. Assume no prepayment of mortgages in the pool. Below are the cash flow information involved in this case.
LOAN SCHEDULE FOR MORTGAGE POOL
YEAR
Beg. Bal
Payment
Interest
Principal
End Bal
Prepayment
1
(A)
?
?
$8,784.36
?
0.00
2
?
?
13,121.56
$9,662.79
?
0.00
3
?
?
12,155.29
$10,629.07
110,923.78
0.00
4
110,923.78
?
11,092.38
$11,691.98
99,231.81
0.00
…
…
…
…
...
…
…
CLASS Z TRANCHE
Amount
$60,000
Rate
10.00%
YEAR
Beg. Bal
Interest
Total Payment
End Bal
1
$60,000.00
?
0.00
?
2
?
(B)
0.00
?
3
?
7,260.00
0.00
?
4
?
7,986.00
0.00
?
…
…
…
…
…
CLASS A TRANCHE
Amount
$50,000
Rate
7.00%
YEAR
Beg. Bal
Interest
Principal Payment
End Bal
1
$50,000.00
?
$14,784.36
$?
2
35,215.64
?
16,262.79
?
3
?
?
(C)
?
4
?
?
1,063.78
0.00
…
…
…
…
…
CLASS B TRANCHE
Amount
$25,000
Rate
8.00%
YEAR
Beg. Bal
Interest
Principal Payment
End Bal
1
$25,000.00
$2,000.00
?
$25,000.00
2
25,000.00
2,000.00
?
25,000.00
3
25,000.00
2,000.00
?
25,000.00
4
25,000.00
2,000.00
(D)
?
…
…
…
…
…
RESIDUAL CLASS
YEAR
Total in pool
Other Classes
Residual
-$5000
1
$22,784.36
?
(E)
…
…
…
…
What is the answer for blank (B) in the CLASS Z TRANCHE table above?
$6,300
$6,000
$7,000
$6,600
LOAN SCHEDULE FOR MORTGAGE POOL
YEAR
Beg. Bal
Payment
Interest
Principal
End Bal
Prepayment
1
(A)
?
?
$8,784.36
?
0.00
2
?
?
13,121.56
$9,662.79
?
0.00
3
?
?
12,155.29
$10,629.07
110,923.78
0.00
4
110,923.78
?
11,092.38
$11,691.98
99,231.81
0.00
…
…
…
…
...
…
…
Explanation / Answer
Option D: $6600
It is given in question that the interest will accrue as a part of the principal and compounded interest will be payable.
Beginning Balance Interest @ 10% Principal Payment Closing balance $60000 $6000 $0 $66000 $66000 $6600 $0 $72600 $72600 $7160 $0 $79860 $79600 $7986 $0 $87846Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.