Question

The following information is for a collateralized mortgage obligation (CMO). Tranche A of $50 million receives quarterly payments at 9 percent per year, tranche B of $100 million receives quarterly payments at 10 percent per year, and tranche C of $50 million receives quarterly payments at 11 percent per year.If at the end of the first quarter, the CMO trustee receives total cash flows of $8 million, how are they distributed among the three tranches? (0.2 points)5. What is the principal outstanding on Tranche A, Tranche B, and Tranche C after the end of year payment in the previous question? (0.2 points)

Answer 1

Tranche A interest $50m*9%*3/12 $1,125,000

Tranche B interest $100m*10%*3/12 $2,500,000

Tranche C interest $50m*11%*3/12 $1,375,000

Principal balances:

Tranche A $47 million

Tranche B $100 million

Tranche C $50 million

Step-by-step explanation:

The approach in debts securitization is that the most senior tranche,tranche A in this question receives any payment received in excess of periodic payment of interest.

On that basis,the quarterly payments can be shared between the three tranches as follows:

Total quarterly payment received $8000,000

Tranche A interest $50m*9%*3/12 ($1,125,000)

Tranche B interest $100m*10%*3/12 ($2,500,000)

Tranche C interest $50m*11%*3/12 ($1,375,000)

Balance left $3,000,000

As earlier reiterated, the balance of $3 million would be used to redeem part of tranche A,hence in tranche A is $47 million($50m-$3m):

Principal balances:

Tranche A $47 million

Tranche B $100 million

Tranche C $50 million