Question

IV. Securities  

Pass-through mortgage securities

Mortgage-backed bonds

Collateralized mortgage obligations (CMO)

1. Which security above is established where principal and interest payments flow to the owner of the security?

2. Which security above may have a varying exposure to defaults?

3. Which security above is secured by the mortgages?

4. Three tranches of a CMO are established. Tranche A will receive all payments until the monthly coupon payment is satisfied. Tranche B will receive payments ONLY after Tranche A’s coupon payment is satisfied. Tranche C will receive payments ONLY after the coupon payments of Tranche A and B are satisfied.

Tranche A’s total monthly coupon payment is $50,000.

Tranche B’s total monthly coupon payment is $100,000.

Tranche C’s total monthly coupon payment is $150,000.

In January, $250,000 in payments are received.

         How much money flows to Tranche A?

         Tranche B?

         Tranche C?

Answer 1

ANS1.

a) Collateral Mortgage Obligation (CMO) is a type of Mortgage backed security in which all the mortgages are bundled together and sold as one investment . CMO distribute the principal and interest payments to their investors based on the agreed terms and conditions

b) In Pass through mortgage securities the interest and principal received from the borrower is passed or can say flowed to the owner of the security

c) In Mortgagae backed bonds payment is being made as per the maturity and interest agreed

Ans 2.

Collateral Mortgage Obligation(CMO) have different types of tranches depending on the different risk categories and interest rates hence it has varying exposure to defaults

Ans 3.

Pass through mortgage securitites are secured with mortgages

Ans4.

Out of $250000 the Tranche A is supposed to receive the monthly coupon payment of $50000 , after paying that Tranche B will receive its monthly coupon amount of $100000 and as C can be paid only after A & B are paid hence the balance (250000-50000-100000)$100000 will be paid to C Tranche