Question 1 ITK Bank has 30-year mortgages with a total of $360 million and a coupon of 12 per cent per annum paid quarterly. Construct a 30-year CMO using this mortgage pool as collateral. You have the following information available: There are three tranches (where A offers the least protection against prepayment and C offers the most). Tranche A has a value of $100 million and it makes quarterly payments of 11 per cent per annum; Tranche B has a value of $160 million with quarterly payments of 12 per cent per annum; and Tranche C has a total value of a $100 million and it makes quarterly payments of 13 per cent per annum. Requirements: Assume 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? Show detailed calculations. [3 marks] If, over the first year, the trustee receives quarterly prepayments of $20 million on the mortgage pool, how are the funds distributed? Show the beginning balance, mortgage payment, interest payment, principal payment and remaining principal. [4 marks] How are the cash flows distributed in the first and second quarter of the second year if in the first quarter of the second year prepayments are $60 million? Show the beginning balance, mortgage payment, interest payment, principal payment and remaining principal. [3 marks] A. B. C