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CMO security offering with sequential annual pay tranches coupon rate amount issued Mortgage pool CMO Classes Mortgages $100,000,000 Class A Bonds 3.00% $30,000,000 6% interest
CMO security offering with sequential annual pay tranches coupon rate amount issued Mortgage pool CMO Classes Mortgages $100,000,000 Class A Bonds 3.00% $30,000,000 6% interest rate Class B Bonds 4.25% $30,000,000 10 year maturity Class Z Bonds 5.50% $30,000,000 Total bonds $90,000,000 Total assets $100,000,000 Equity contribution by issuer $10,000,000 Total debt and equity $100,000,000 Rules of cash distributions to A, B and Z: interest is paid currently on tranches A and B, but it is not paid on tranche Z until principal on the other tranches is repaid. For tranche Z, interest will be accrued and accumulated into the investment balance. In addition, to ensure that the maturity of tranche A securities is kept relatively short, the interest accrued to tranche Z and all current principal and prepayments from the entire mortgage pool will be allocated to tranche A, and then to tranche B.
CMO security offering with sequential annual pay tranches | ||||
---|---|---|---|---|
coupon rate | amount issued | |||
Mortgage pool | CMO Classes | |||
Mortgages | $100,000,000 | Class A Bonds | 3.00% | $30,000,000 |
6% interest rate | Class B Bonds | 4.25% | $30,000,000 | |
10 year maturity | Class Z Bonds | 5.50% | $30,000,000 | |
Total bonds | $90,000,000 | |||
Total assets | $100,000,000 | Equity contribution by issuer | $10,000,000 | |
Total debt and equity | $100,000,000 | |||
Rules of cash distributions to A, B and Z: interest is paid currently on tranches A and B, but it is not paid on tranche Z until principal on the other tranches is repaid. For tranche Z, interest will be accrued and accumulated into the investment balance. In addition, to ensure that the maturity of tranche A securities is kept relatively short, the interest accrued to tranche Z and all current principal and prepayments from the entire mortgage pool will be allocated to tranche A, and then to tranche B. |
Questions
- [5 points] Suppose that there are no prepayment and no default, what are the cash flows for Class A, Class B and Class Z bonds? What is the IRR for the issuer?
- [5 points] Suppose that there are 15% prepayment and no default, what are the cash flows for Class A, Class B and Class Z bonds? What is the IRR for the issuer?
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