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 trancheB 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.