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4. Consider the following CMO structure backed by the mortgage pool collateral: (40 points) Mortgage Pool Weighted average maturity (WAM): 357 months Mortgage Pool: $400

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4. Consider the following CMO structure backed by the mortgage pool collateral: (40 points) Mortgage Pool Weighted average maturity (WAM): 357 months Mortgage Pool: $400 million Weighted average coupon (WAC): 8.25% Assume the prepayment speed is 150 PSA Pass-through rate is 7.875% CMO has a Sequential-Pay Structure A $192,000,000, 6.50% B $72,000,000, 6.75% C $88,000,000, 7.00% D $48,000,000, 7.25% a. Assume that the current quote is 102-6/32 on tranche A, 101-13/32 on tranche B, 98-20/32 on tranche C, and 99-17/32 on tranche D. Estimate the cash flow yield for each tranche respectively. b. Suppose you want to create a floating rate tranche and an inverse floating rate tranche from tranche C. The coupon on the floating rate tranche is (LIBOR + 175 bps). The principal of the floating rate tranche is 80% of the par value of tranche C and the principal of the inverse floating rate tranche is 20% of the par value of tranche C. Find out what the cap rate (K) and leverage rate (L) is for the inverse floater. c. Suppose that the issuer of this CMO wants to create a notional IO tranche with a 7.875% coupon. Calculate the principal amount for this notional IO tranche. 4. Consider the following CMO structure backed by the mortgage pool collateral: (40 points) Mortgage Pool Weighted average maturity (WAM): 357 months Mortgage Pool: $400 million Weighted average coupon (WAC): 8.25% Assume the prepayment speed is 150 PSA Pass-through rate is 7.875% CMO has a Sequential-Pay Structure A $192,000,000, 6.50% B $72,000,000, 6.75% C $88,000,000, 7.00% D $48,000,000, 7.25% a. Assume that the current quote is 102-6/32 on tranche A, 101-13/32 on tranche B, 98-20/32 on tranche C, and 99-17/32 on tranche D. Estimate the cash flow yield for each tranche respectively. b. Suppose you want to create a floating rate tranche and an inverse floating rate tranche from tranche C. The coupon on the floating rate tranche is (LIBOR + 175 bps). The principal of the floating rate tranche is 80% of the par value of tranche C and the principal of the inverse floating rate tranche is 20% of the par value of tranche C. Find out what the cap rate (K) and leverage rate (L) is for the inverse floater. c. Suppose that the issuer of this CMO wants to create a notional IO tranche with a 7.875% coupon. Calculate the principal amount for this notional IO tranche

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