Q4 Atlantic Bank has lent out $200 million of 30-year mortgages with a coupon of 10 per cent per annum paid quarterly. The quarterly mortgage payment is $5 272 358. The table below shows the interest and principal repayments over the first year of life of the mortgages. Qtr Balance Payment (R) Interest Principal Remaining (fixed) payment payment principal 1 $200m $5.272m $5m $0.272m $199.728m 2 199.728 5.272 4.993 0.279 199.449 3 199.449 5.272 4.986 0.286 199.163 4 199.163 5.272 4.979 0.293 198.87 Atlantic Bank is now considering taking the risk from these mortgages off their balance sheet. They will construct a 30-year CMO using this mortgage pool as collateral. There are three tranches (where A offers the least protection against prepayment and C offers the most). A $50 million Tranche A makes quarterly payments of 9 per cent per annum; a $100 million Tranche B makes quarterly payments of 10 per cent; and a $50 million Tranche C makes quarterly payments of 11 per cent. (a) Explain why Tranche A, while having the least protection from prepayment, yet receives the lowest coupon rate among the tranches. (b) Assume non-amortisation of principal and no prepayments. What are the total promised coupon payments to the three classes? What are the principal payments to each of the three classes for the first year? (c) If, over the first year, the trustee receives quarterly prepayments of $10 million on the mortgage pool, how are the funds distributed?