CMBS deal based on a $100 million pool of commercial mortgages, comprised of 10 identical size loans. Each mortgage is a three-year, 10% interest-only, annual payment balloon loan. Each loan has an 80% loan-to-value ratio. The mortgage pool has been carved into three tranches of bond as follows plus IO tranche.

IO receive their coupon payments from extra interest cash owe in the pool. Each tranche is a claim to a certain amount of principal, plus interest on that principal. This old style CMBS has no prepayment penalties. Assume defaults happen every year before paying interest and principal. No sale for foreclosed houses.

1-Please fill the following table for cash flows if no default or prepayment

2-Please fill the following table for cash flows if two loans default at the end of Year 1 and other four loans default at the end of Year 2. Whats the tranches

LTV for A and B?

3-Please fill the following table for cash flows if four loans prepay at the end of Year 1 and other four loans prepay at the end of Year 2. Discuss how prepayment affect the return of each tranche.

Tranches B 10 Par Value $50 $20 $30 NA Coupon 8% 9% 10% Year1 Year2 Year3 Principal interest Principal Interest Principal Interest A B IO Year1 Year2 Year3 Principal interest Principal Interest Principal Interest A B IO Year1 Year2 Year3 Principal interest Principal Interest Principal Interest A B IO Tranches B 10 Par Value $50 $20 $30 NA Coupon 8% 9% 10% Year1 Year2 Year3 Principal interest Principal Interest Principal Interest A B IO Year1 Year2 Year3 Principal interest Principal Interest Principal Interest A B IO Year1 Year2 Year3 Principal interest Principal Interest Principal Interest A B IO