A mortgage-backed security (MBS) is organized in to two PAC tranches and a subordinated tranche. The balances at the beginning of a particular month are PAC-A $300,000; PAC-B $200,000 and S-tranche $300,000. During the month, the regular principal payment is $100,000 and coupon payment is $10,000. There is prepayment of $50,000 during the month. Payment distribution rule states: All regular principal payments are distributed to the PAC tranches in proportion to their beginning balance of the months. S-Tranche gets paid from regular principal payments only after the PAC tranches are fully paid. Coupon payments are made to all tranches in proportion to beginning balances. Prepayments are distributed to S-tranche until it is fully paid, then to PAC-B until it is fully paid and then to PAC-A. Liquidation payments in case of bankruptcy are made to PAC-A first, the to PAC-B and then to S-Tranche.

a) prepare a schedule that shows the payments of regular principal, coupon and the prepayment to the three tranches.

b) what is the reason for such a rule of paying all principal prepayment to the support tranche first instead of to the PAC tranches?

c) assume immediately after the above payments, the MBS is in default and is liquidated for a net $300,000. How would this be distributed to the tranches? Show.