Questions about MBS and CMO: A) Suppose that $600 million of pass-throughs is used to create a CMO structure with a PAC bond with a par value of $500 million and a support bond with a par value of $100 million. Answer the following questions. Out of the three: (i) the collateral, (ii) the PAC bond, and (iii) the support bond, which will have the greatest average life variability? Why? Which of the three will have the least average life variability? Why?

B) Based on an original par value of $600 million of pass-through securities, $450 million was classified as the senior class and the remaining $150 million was the subordinated class. Please calculate the loss ratio or percentage (=loss/original par amount of class) for each class if the total default loss is $160 million of principal.

C) Following from above, suppose we add a shift-interest structure to the $600 million of pass-through securities and the prepayment schedule is set as follows: In months 1-12, percentage of prepayments directed to senior class is 85%; in months 13-36, 80%; in months 37-60, 75%. Assume we are now 11 months after issuance and the cumulative total principal payment received is $60 million ($40 million regular principal payment and $20 million prepayment). Please show how subordination level changes from origination to after the $60 million cumulative principal payment. Subordination level = par value of subordinate class/par value of total issue.