Question
Imagine a mortgage pool that consists of 100 $1,100 mortgages. (No, this is not 1910. It is just that $110,000 worth of mortgages is an
Imagine a mortgage pool that consists of 100 $1,100 mortgages.
(No, this is not 1910. It is just that $110,000 worth of mortgages is an
easier number to work with than $110,000,000). The mortgages pay an
average of 7.20%, compounded monthly. Imagine that Collateralized
Mortgage Obligations (CMOs) consisting of four tranches are issued on this
mortgage pool. Assume initially that the principal owed for each tranche is
$27,500. The first obligation is to pay the interest on tranches A,
B, and C. tranche A will receive an interest rate of 6.48%, tranche B
will receive an interest rate of 6.84%, and tranche C will receive an
interest rate of 6.96%. A forth tranche Z will earn accrued interest of
7.92%, but will receive none of this interest until the principal for
all the other tranches are paid off in full.
If the total payments for a month exceeds the total accrued interest
owed to tranches A, B, and C, then the principal on tranche A will be paid
down. Only if the principal owed to tranche A is completely paid off, will
any extra payments for the month be used to pay off principal owed to
tranche B. Only if the principal owed to tranches A and B are completely
paid off, will any extra payments for the money be used to pay off
principal owed to tranche C. Finally, only if the principal owed to
tranches A, B, and C are completely paid off, will tranche Z receiving anything.
The payments for the mortgage pool are as shown below for the first six months:
Month 1: $ 9,900
Month 2: $ 12,100
Month 3: $ 16,500
Month 4: $ 20,900
Month 5: $ 28,600
Month 6: $ 14,300
Please determine the total monthly payments for each tranche and put the
answers in the table below:
Tranche A payment | Tranche B payment | Tranche C payment | Tranche Z payment |
Month 1 |
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Month 2 |
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Month 3 |
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Month 4 |
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Month 5 |
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Month 6 |
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