Consider $ 200 million of 30-year mortgages with a coupon of 10 percent paid quarterly. a. What

Question:

Consider $ 200 million of 30-year mortgages with a coupon of 10 percent paid quarterly.

a. What is the quarterly mortgage payment?

b. What are the interest repayments over the first year of life of the mortgages? What are the principal repayments?

c. Construct a 30-year CMO using this mortgage pool as collateral. There are three tranches (where A offers the least protection against prepayment and C offers the most). A $ 50 million tranche A makes quarterly payments of 9 percent; a $ 100 million tranche B makes quarterly payments of 10 percent; and a $ 50 million tranche C makes quarterly payments of 11 percent.

d. Assuming no amortization of principal and no prepayments, 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?

e. If, over the first year, the trustee receives quarterly prepayments of $ 10 million on the mortgage pool, how are the funds distributed?

f. How can the CMO issuer earn a positive spread on the CMO?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...