Consider $ 100 million of 30-year mortgages with a coupon of 5 percent per year paid quarterly.

Question:

a. What is the quarterly mortgage payment?

b. What are the interest and principal repayments over the first year of life of the mortgages?

c. Construct a 30-year CMO using this mortgage pool as collateral. The pool has three tranches, where tranche A offers the least protection against prepayment and tranche C offers the most protection against prepayment. Tranche A of $ 25 million receives quarterly payments at 4 percent per year, tranche B of $ 50 million receives quarterly payments at 5 percent per year, and tranche C of $ 25 million receives quarterly payments at 6 percent per year.

d. Assume nonamortization of principal and no prepayments. What are the total promised coupon payments to the three classes? What are the principal payments to each of the three classes for the first year?

e. If, over the first year, the trustee receives quarterly prepayments of $ 5 million on the mortgage pool, how are these funds distributed?

f. How are the cash flows distributed if prepayments in the first half of the second year are $ 10 million quarterly?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...