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Assume that a pool of mortgages with aggregate par value of $500 million is used as collateral for an asset backed security. The weighted average

Assume that a pool of mortgages with aggregate par value of $500 million is used as collateral for an asset backed security. The weighted average coupon on the mortgages is 8.1% and the pass-through coupon rate is 7.2%.

  1. Assume instead of the tranches above, the pool is organized as a planned amortization class (PAC) tranches and support tranche as follows.

Tranche

Par, $ million

Payment Rule

P-A

150

Monthly coupon payment is distributed in proportion to beginning principal balance. All scheduled principal payments are made first to the PAC tranches in proportion to their par. Support tranche gets distribution from scheduled principal payment only after the PAC tranches are paid off. Any principal payment in excess of schedule is paid to Support tranche until it is completely paid off. Then excess will be paid to the PAC tranches.

P-B

100

P-C

100

Support

150

  1. Prepare payment schedule assuming payment of the coupon determined in (a), and scheduled principal payment of $20 million and excess principal prepayment of $15 million.
  2. Prepare payment schedule assuming that after the first month payment in (i) the borrowers default and repossession of the underlying properties resulted in realization of a net $250 million.

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