Consider a CMBS with the following characteristics: Backed by $20M mortgages, 7% interest, 5-yr maturity, IO annual payments, no servicer fee There are three tranches issued: 

– $13M Tranche A (Senior/Investment Grade CMBS) with coupon rate 5% 

– $7M Tranche B (Junior/ Non-investment Grade CMBS) with coupon rate 6% 

– IO residual tranche (no extra collateral, but collects extra interest) Assume no defaults. What is the cash flow to Tranche A in year 1? 

Assume no defaults. What is the cash flow to Tranche B in year 5? Now consider a situation where there is a recession in year 5. The SPV/issuer is only able to collect payments and sell the underlying collateral for a total of $18M. In other words, it only has $18M to disburse to its investors in year 5. In this scenario, what is the cash flow to Tranche B in year 5?  What is the subordination on this CMBS? (answer in %, e.g. for 5% enter 5).