1. TranchePrincipalRate
2. A$5M5%
   2. B$10M6%
   3. C$20M8%

1. Theabovetableillustratesthestartingprincipalonaeachclassofasequentialpaysecurity.
2. Aisthemostseniorclassandwillbepaidofffirst,Cisthemostjuniorclassandwillbepaidofflast.WhatistheWAConthisCMOatthepointintimewheretheAclasshasbeencompletelyrepaid,butbeforeBreceivesanyprincipalpayments?
3. A.6.33%
4. B.6.50%
5. C.7.00%
6. D.7.33%
7. E.Noneoftheabove

RES 3400 Real Estate Capital Markets Midterm Exam #2 Instructor: Meagan McCollum Department of Real Estate Baruch College April 20, 2016 Name: Instructions: You have the entire exam period, 2:30PM-3:45PM or 5:50PM-7:05PM, to complete this exam. You may use an approved calculator. (No cell phones and no graphing calculators.) There are 12 multiple choice questions (5 points each), 1 calculation questions (60 points total), 1 discussion question (10 points), and 2 extra credit questions (5 points each). No partial credit will be given for multiple choice questions. Partial credit may be given on calculation questions if you show your work. Partial credit may be given on the discussion question. You must complete the exam in pen. You are welcome to write on the test, but you must return it once the exam is complete. You must attach any scratch paper used to your exam. Please clearly circle answers to multiple choice questions. Any tests not returned when time has ended will NOT be graded. Good luck! 1 Multiple Choice Questions (5 points each) 1. Which of the following increases default risk to CMBS investors? A. Geographic concentration B. Long-term leases C. External tail D. All of the above E. None of the above 2. What is the Macaulay duration of a 2 year bond with a par value of $1,000 that makes 5% annual coupon payments, given a market discount rate of 6%? Do not round your answer until the final step. A. 1.84 B. 1.86 C. 1.95 D. 2.00 E. None of the above 3. Given a 2 year bond with a par value of $1,000 that makes 5% annual coupon payments and 6% market discount rate. If the market yield increases by 20bp, what is the estimated percentage change in price of the bond given what we know about the bond's duration? Do not round your answer until the final step. A. -0.37% B. 0.37% C. -0.39% D. 0.39% E. None of the above 4. Which is true about investors in the B piece of a CMBS? A. If there is default, the senior class takes all losses before B piece investors lose anything. B. Typical investors include pension funds and life insurance companies. C. These investors often have significant influence over how the deal is structured. D. Given the high demand for the B piece of the CMBS, CDOs were created to help meet this demand. E. None of the above 5. Which of the following is true about Z-spread (zero-volatility spread)? A. Z-spread is another term for nominal spread. B. Z-spread is an appropriate metric to evaluate RMBS. C. Z-spread and OAS are identical if the yield curve is flat. D. None of the above. 2 6. You are an investor who has bought the B piece of a CMBS deal that has 10% credit support. The pool is comprised of 20 IO loans, each with a balance of $1,000,000 and an interest rate of 5% that are all maturing in 1 year. The loans make annual payments at the end of the year. The coupon on the senior class is 3% and the coupon on the junior class is 5%. If 6 of the 20 loans default, and the recovery rate (proceeds from the foreclosure sale) on each loan that defaults is 50%, what will be the cash flow to the junior class at the end of year 1? A. -$4,000,000 B. $0 C. $600,000 D. $2,000,000 E. $2,100,000 Tranche A B C Principal $5M $10M $20M Rate 5% 6% 8% 7. The above table illustrates the starting principal on a each class of a sequential pay security. A is the most senior class and will be paid off first, C is the most junior class and will be paid off last. What is the WAC on this CMO at the point in time where the A class has been completely repaid, but before B receives any principal payments? A. 6.33% B. 6.50% C. 7.00% D. 7.33% E. None of the above 8. Which of the following is a type of prepayment penalty in CMBS? A. Yield maintenance B. Step-down C. Defeasance D. All of the above E. None of the above 9. As we widen the collar on a PAC (e.g. go from collar of 100-200PSA to 50-250PSA), which of the following is true, all else equal? A. Extension risk decreases, contraction risk increases to PAC investor. B. Contraction risk increases, extension risk decreases to PAC investor. C. Prepayment risk to investors in companion securities decreases. D. Price of the PAC security increases. E. None of the above. 3 10. Which of the following is a credit rating that a mezzanine class of a CMO is likely to receive? A. AAA B. BBB C. CCC D. Unrated E. None of the above 11. Which of the following statements about convexity is true? A. RMBS often display negative convexity because borrowers have the right to prepay their loans. B. If a bond has negative convexity its price appreciation when market yields decline will be less than that of a bond with positive convexity. C. As a bond's convexity increases, duration becomes a worse estimate for change in price for a given change in yield. D. All of the above are true. E. None of the above are true. 12. If a CMO has 3 tranches, A, B, and Z (an accrual tranche), as well as a residual class, answer the following question. Assuming the A class has a maturity of longer than 1 period, what will the happen to the balance of the Z class at the end of the first period as compared to its value at origination? A. Increase B. Decrease C. Stay the same D. Can not be determined without more information 4 Calculation Question (60 points total, must show work for partial credit) 13. This question is based on the following CMO: 500 residential loans, average starting loan balance $200,000 10 year FRMs with annual payments, WAC 5% Given the cash flows in Table 1 answer the following questions: Suppose the entire pool of loans is used to form PO/IO securities. - A. If the discount rate in the market is currently 6%, how much should an investor be willing to pay for the PO strip, assuming no prepayment? (5pts) - B. If instead there was a prepayment rate of 10 CPR and discount rate of 6%, would the price of the PO strip be higher, lower, or the same as that in part A? Why? (5pts) - C. Imagine you bought the IO strip at origination and market rates were 4% and you expected there to be no prepayment. However, in reality, 10 CPR turns out to be the true realized prepayment rate. What is the IRR of the IO strip under this scenario? Hint: You are given information on how to calculate the price you paid for the security as well as the cash flows you actually received, the two pieces of information you need to solve this problem.(5pts) - D. Describe the relationship between IRR and prepayment rates for the PO strip and the IO strip. (1 sentence, 3 pts) 5 Now, suppose than instead the CMO was structured as a sequential pay security. There is $20,000,000 of principal allotted to the A Tranche, which has a coupon rate of 3.75%, $30,000,000 of principal allotted to the B Tranche, which has a coupon rate of 4.25%, $45,000,000 of principal allotted to the Z (accrual) Tranche, which has a coupon rate of 5%. The issuer (residual) will receive cash flows after payment rules to other classes are satisfied. The payment rules are as follows: Priority payments will be made to the A tranche and the A class will be first to receive their promised coupon payment. The B class will receive interest payments only until the A class is repaid. In addition to interest, A will receive priority payments toward principal in the amount of sum of principal repayment by the pool and the interest accrued to Z in that period. After A is repaid, B then will receive priority payments of amortization and accrued interest according the same rules as A. The Z class will accrue interest until both A and B are repaid. Z will receive current interest and principal payments at that time according to the same rules as A and B. All cash flows from the pool that are not designated by the above rules will go to the residual class in that period. - A. What would the payments (cash flows) to the investors be in year 1 to the A tranche, B tranche, Z tranche, and the residual class when prepayment is at 10 CPR? (3 points each) - B. Given your answer to part A. and the information in the table below what is IRR to the residual? (2pts) - C. If there was no prepayment, would the year 1 ending value of Tranche A be higher, lower, or remain the same? (1pt) - D. If instead the payment rules were such that the issuer (residual) will receive cash flows only after all classes of investors have been completely repaid. and you were told that the Z class began year 10 with an outstanding balance of $8,000,000 and the CMO generated cash flows consistent with the cash flows presented under the 0 prepayment scenario, what would be the IRR to the residual class? (5 points) Cash Flows to the Residual Time 0 1 2 3 4 5 6 7 8 9 10 CF ? ? 473,497 338,433 250,000 250,000 250,000 250,000 250,000 1,684,293 3,743,992 6 Finally, imagine that $10,000,000 of this CMO was set aside to form floater and inverse floater securities that will generate payments based on the WAC on the pool at origination. If the payment rule to the floater class is LIBOR+60bp and $6 million is the principal balance allocated to the floater class, answer the following questions: - - - - - A. What is the formula for the rate to be paid to the inverse floater class? (5pts) B. What is the maximum cap rate on the floater class? (5pts) C. If LIBOR is currently at 3%, what is the payment to the inverse floater class? (5pts) D. If LIBOR is currently at 10%, what is the payment to the floater class? (5pts) E. If instead the principal was allocated evenly amongst the F and IF classes, would the maximum cap rate to the floater increase, decrease, or stay the same? (2 pts.) 7 14. Discussion Question (10 points) Imagine you presented with the opportunity to invest in an agency RMBS deal or a CMBS deal. Briefly describe some of the risks that you should consider before making an investment and how they may impact your expected return. Additionally, be sure to specify which risks are specific to RBMS, which risks are specific to CMBS, and which risks they have in common. (5 sentences maximum. I will deduct 2 points for each additional sentence over the limit you submit. You do not have to describe every possible risk, just discuss a few of the risks that you feel are the most significant.) 8 Extra Credit (Up to 5 points each, optional) 15. Question about the speaker. If you attended the 2:30pm class, briefly discuss the process of putting together a private equity deal. From the perspective of the investors is this a short term or long term investment? Why? If you attended the 5:50pm class, name a few sources of funding for REITs? How is analyzing the financial statements of a publicly REIT different than analyzing the financial statements of other publicly traded companies? 16. Compare and contrast a residual IO class and a residual class formed from overcollateralization. 9 Figure 1: 10