In this question, you will create a CMO structure, price 2 tranches, and compare each tranche's exposure to prepayment risk.
Construct your sequential-pay CMO as follows:
Assume that the WAC is 3.50%, the WAM is 360, and that the PSA is 150.
Tranche A B C D Total
Principal $224,000,000 $44,500,000 $96,500,000 $33,000,000 $400,000,000
Coupon 4.25% 4.25% 4.25% 4.25%
Payment rules:
1. For payment of periodic coupon interest: Disburse periodic coupon interest to each tranche on the basis of the amount of principal outstanding at the beginning of the period.
2. For disbursement of principal payments: Disburse principal payments to tranche A until it is paid off completely. After tranche A is paid off completely, disburse principal payments to tranche B until it is paid off completely. After tranche B is paid off completely, disburse principal payments to tranche C until it is paid off completely. After tranche C is paid off completely, disburse principal payments to tranche D until it is paid off completely.
a. Provide the balance and complete set of cash flows to Tranches A and D over the lifetime of the CMO. Be sure to separate Principal payment from Interest payment. (15 points)
Your answer should look like the following.
5
TRANCHE A TRANCHE D Principal Interest Principal Interest Month Balance Balance Payment Payment Payment Payment
1
2