1. There is $150 million of a 20-year mortgage with a coupon payment of 4.5% per

year and paid monthly.

a. Construct 3 tranches of A with a coupon payment of 3.5% per year and

least prepayment protection, B with a coupon payment of 4.5% per year,

and C with equal amount of $50 million and the most prepayment

protection. What is the coupon payment of Tranche C so that the

mortgage above could be used as a collateral against the monthly

payments of these three tranches?

b. How are the cash flows distributed if the monthly payment of $950,000 is

received in the first month?