Question: A CMO is being issued with 2 tranches. The A tranche will consist of $50MM of principal and have a coupon of 7%. The B

A CMO is being issued with 2 tranches. The A tranche will consist of $50MM of principal and have a coupon of 7%. The B tranche will consist of $50MM of principal and have a coupon of 7%. The mortgages backing the security issued are FRM at 7% with 10 year maturities and annual payments (for simplicity).

Priority payments will be made to the A tranche and will include the promised coupon. The B class will only receive interest payments until the A class is repaid.

Assume there is no prepayment and no servicing fees.

A) Given the information presented above, what is the total cash flow to each class of investors in year 1 (i.e. How much will class A receive and how much will Class B receive)?

Please show work on excel with formulas. Kindly appreciated.

B) What is the balance of the Class A tranche at the end of year 3?

C) What is the balance of the Class B tranche at the end of year 7?

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