During a Commercial Mortgage-Backed Securities (CMBS) mission, 16 interest-only mortgage loans on commercial properties are grouped into a pool. Each interest-only mortgage loan has a term of 6 years, a principal of $1,000,000 and an interest rate of 8% per year.

After analysis by a rating agency, three tranches are placed from the pool:

- Tranche A (senior) of $8,000,000 paying interest of 6% per year

- Tranche B (subordinate) of $6,000,000 paying interest of 11% per year

- Tranche C (residual) amount of $2000000.

a) establish the table of flows of the pool and the 3 tranches if all the mortgage loans in the pool are repaid in full in year 6.

b) establish the table of flows of the pool and the 3 tranches if chance of the CMBS, 8 mortgage loans in the pool (i.e. half of the pool) are subject to non-payment resulting in the sale of commercial properties under mortgage on these loans up to 70% of the principal d. Other loans are subject to full repayment.

c) Calculate the internal rates of return (IRR) of the three tranches in previous questions a and b. Discuss your results.