You have been assigned to calculate how much money each Tranche will receive. There are 10 mortgages in a pool. Each mortgage has a value of $10,000,000 for a total pool of $100,000,000. Each mortgage is an interest only mortgage paying a 6% interest rate. Half of the mortgages will mature this year and half of them will mature next year. An A Tranche has been established with a par of $75,000,000 and a coupon of 4%. A B Tranche has been established with a par of $25,000,000 and a coupon of 6%. Finally, an Interest Only Tranche has also been established. 3 mortgages default after the first year. Investors will only recover half of the value of each of these 3 mortgages.

• 1.CalculatescheduledandreceivedcashflowsforeachTrancheandthePoolasawholeforbothyears.(20points)
• 2.ExplainwhyTrancheAhasalowercouponratethanTrancheB.(5points)
• 3. Explain how an Interest Only Tranche can be created and why this is the only bond in the world thats value goes down as interest rates go down.