IV. Securities

Pass-through mortgage securities

Mortgage-backed bonds

Collateralized mortgage obligations (CMO)

1. Which security above is established where principal and interest payments flow to the owner of the security?

2. Which security above may have a varying exposure to defaults?

3. Which security above is secured by the mortgages?

4. Three tranches of a CMO are established. Tranche A will receive all payments until the monthly coupon payment is satisfied. Tranche B will receive payments ONLY after Tranche As coupon payment is satisfied. Tranche C will receive payments ONLY after the coupon payments of Tranche A and B are satisfied.

Tranche As total monthly coupon payment is $50,000.

Tranche Bs total monthly coupon payment is $100,000.

Tranche Cs total monthly coupon payment is $150,000.

In January, $250,000 in payments are received.

How much money flows to Tranche A?

Tranche B?

Tranche C?