Absa investment banking division has decided to pool r100 million of their mortgage portfolio. the intention is to sell it up on the secondary mortgage market. the pool consists of 5 loans of equal proportion. 3 of the loans would mature in 1 year while 2 of the other loans would mature in year 2. absa have decided to create 3 tranches of investment grade cmbs namely senior investment grade cmbs tranche a worth r75m, junior noninvestment grade cmbs tranche b worth r25 million. the investment bankers intend to create an x tranche (io) from the senior investment grade cmbs tranche a valued at r100m. the coupons of each tranche are sold as follows: tranche a: 10%, tranche b is 8%. you are to derive the coupon rate of tranche x (i.o). the quote price for the sale of the securities in each tranches as follows: tranche a would be sold at par at r150, tranche b would be sold at a discount of r49.25 and tranche x would be sold at r2.15. tranche a has a credit support of 30% while b has no credit support. a loan would fully default on its principal payment in year 2.

n.b- in your analysis of irr and cash-flows, you are to use the realized cash flow. calculate the following:

a. the weighted average maturity of all tranches

b. calculate the coupon of tranche x (io)

c. calculate the cash flows of each tranche in year 1 and year 2 d. calculate the irr of the cmbs and mortgage pool.