Question

a cmo has 3 tranches, a, b, and z (an accrual tranche), as well as a residual class. if the prepayment on the pool of mortgages that supports the cmo decreases from cpr 10% to cpr 5% when doing projected cashflows, what would happen to the expected maturity of the a class?

Answer 1

A decrease in the prepayment rate from CPR 10% to CPR 5% would typically result in an increased expected maturity for the A class of a CMO, as a slower repayment rate extends the time it takes to repay the principal.

Step-by-step explanation:

If the prepayment rate on the pool of mortgages that supports the Collateralized Mortgage Obligation (CMO) decreases from Conditional Prepayment Rate (CPR) 10% to CPR 5%, the expected maturity of the A class would typically increase.

This is because when prepayments slow down, the principal is repaid at a slower rate, thus extending the time it takes for the A tranche to receive its share of the principal. However, it's important to consider the specific structure of the CMO, as it might have certain mechanisms such as prepayment lockouts or caps that can also affect the maturity.