Question 3

An FI has $150 million of 30-year mortgages with a coupon of 10 percent per year paid

quarterly.

What is the quarterly mortgage payment?

What are the interest and principal repayments over the first two quarters of the mortgages life?

The FI uses this mortgage pool as collateral to create a 30-year CMO with three tranches, where tranche A offers the least protection against prepayment and tranche C offers the most protection against prepayment. Tranche A of $25 million receives quarterly payments at 9 percent per year, tranche B of $75 million receives quarterly payments at 10 percent per year, and tranche C of $50 million receives quarterly payments at 11 percent per year.

Assume nonamortization of principal and no prepayments, what are the total promised coupon payments to the three tranches? What are the principal payments to each of the three tranches for the first two quarters?

If, over the first two quarters, the trustee receives quarterly prepayments of $15 million on the mortgage pool, how are these funds distributed to the three tranches?