Question

The MM Mortgage Company is issuing a CMO with three tranches. The A tranche will consist of $50,000 with a coupon of 7%. The B tranche will be issued with a coupon of 8% and a principal of $25,000. The Z tranche will carry a coupon of 10% with a principal of $60,000. The mortgages backing the security issue were originated at a fixed rate of 10% with a maturity of 10 years (annual payments). The issue will be overcollateralized by $5,000, and the issuer will receive all net cash flows after priority payments are made to each class of securities. Priority payments will be made to the class A tranche and will include the promised coupon, all amortization from the mortgage pool, and interest that will be accrued to the Z class until the principal of $50,000 due to the A tranche is repaid. The B class securities will receive interest-only payments until the A class is repaid, and then will receive priority payments of amortization and accrued interest. The Z class will accrue interest at 10% until both A and B classes are repaid. It will receive current interest and principal payments at that time. Assume no prepayment of mortgages in the pool. Below are the cash flow information involved in this case.

LOAN SCHEDULE FOR MORTGAGE POOL
YEAR	Beg. Bal	Payment	Interest	Principal	End Bal	Prepayment
1	(A)	?	?	$8,784.36	?	0.00
2	?	?	13,121.56	$9,662.79	?	0.00
3	?	?	12,155.29	$10,629.07	110,923.78	0.00
4	110,923.78	?	11,092.38	$11,691.98	99,231.81	0.00
…	…	…	…	...	…	…

CLASS Z TRANCHE
	Amount		$60,000
	Rate		10.00%
YEAR	Beg. Bal	Interest	Total Payment	End Bal
1	$60,000.00	?	0.00	?
2	?	(B)	0.00	?
3	?	7,260.00	0.00	?
4	?	7,986.00	0.00	(C)
…	…	…	…	…

What is the answer for blank (A) in the LOAN SCHEDULE FOR MORTGAGE POOL table above?

	a.	$135000
	b.	$155000
	c.	$140000
	d.	$160000

2 points   

QUESTION 8

1.     What is the answer for blank (B) in the CLASS Z TRANCHE table above?

	a.	$7,000
	b.	$6,300
	c.	$6,600
	d.	$6,000

2 points   

QUESTION 9

1.     What is the answer for blank (C) in the CLASS Z TRANCHE table above?

	a.	87,846
	b.	110,629
	c.	99,232
	d.	79,860

Would someone solve these questions? Thank you!

Answer 1

Answer for Blank A

Yearly payment=Principal+Interest+ Principal

From interest values of year 3 ,we get,yearly payment=$12155.29+$10629.07=22784.36

                      Or from values of year 4=$11092.38+11691.98=22784.36

Interest for year 1=Yearly payment-Principal for year 1

                               =22784.36-8784.36=14000

Beginning balance of year 3=End balance+Principal amount for year 3=110923.78+10629.07

                                                =121552.85=End balance for year 2

Similarly Beg.balance of year 2=121552.85+Principal for year 2=121552.85+9662.79

                                                       =131215.64=End balance for year 1

Beginning balance for year 1=End balance-Principal amount=131215.64+8784.36=$140,000

Thus A=$140,000

Year	Beg.Balance(B)	Payment=(I+P)	Interest (I)	Principal(P)	Cl.BAL(C=A-P)
1	140,000.00	22784.35	13999.99	$8784.36	131215.64
2	131215.64	22784.35	13121.56	$9662.79	121552.85
3	121552.85	22784.36	12155.29	$10629.07	110923.78
4	110923.78	22784.36	11092.38	$11691.98	99231.8

8.Amount in space of “B”

Interest for year 1=60000*10/100=6000.As interest not paid, Closing principal for year     1 becomes=60000+6000=66000(Since interest is unpaid,interest portion gets added to principal)

Interest for year 2=66000*10%=6600,B=$6,600

9.3Answer for blank”C”

In continuance of B=6600,Closing Bal for year 2=66000+6600=72600

Similarly closing balance for year 3=72600+(72600*10%)=72600+7260=79860

Interest for year 4=7986(given)

End balance for year 4,C=79860+7986=$87,846

Year	Beg.Balance(B)	Payment(A)	Interest (I)	Principal(P=A-I)	Cl.BAL(C=A-P)
$       1.00	$      60,000.00	$                           -   0.00	$ 6,000.00	$   (6,000.00)	$       66,000.00
$       2.00	$      66,000.00	$                           - 0.00	$ 6,600.00	$   (6,600.00)	$       72,600.00
$       3.00	$      72,600.00	$   0.00                        -	$ 7,260.00	$   (7,260.00)	$       79,860.00
$       4.00	$      79,860.00	$   0.00                        -	$ 7,986.00	$   (7,986.00)	$       87,846.00