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.

3. 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

First Let us calculate Annual Interest on all the Tranche.

Tranche A= $50 million * 9% = $4.5 million.

Tranche B = $100 million *10% = $10 million.

Tranche C = $50 million* 11% = $ 5.5 million.

Now let us calculate quarterly interest on all the Tranche

Tranche A = $4.5 million/ 4 = $1.125 million

Tranche B = $10million/ 4 = $2.5 million

Tranche C = $5.5 million / 4 = $ 1.375 million

Total quaterly interest = $ 5 million.

Now the total cash flow received is $ 8 million.

First, the $ 5 million interest on all the tranche will be paid. The amount pending is $ 8 million - $ 5 million = $ 3 million.

Considering sequential pay CMO, $ 3 million will be paid to Tranche A as the principal amount. Hence principal outstanding of Tranche A will be $ 50 million - $ 3 million = $ 47 million.

Principal outstanding on all the Tranche after Ist quarter cash flow is as follows :

Tranche A = $ 47 million.

Tranche B = $ 100 million.

Tranche C = $ 50 million.