CMBS deal based on a $100 million pool of commercial mortgages, comprised of 10 identical size loans. Each mortgage is a three-year, 10% interest-only, annual payment balloon loan. Each loan has an 80% loan-to-value ratio. The mortgage pool has been carved into three tranches of bond as follows plus IO tranche.

1. receive their coupon payments from extra interest cash owe in the pool. Each tranche is a claim to a certain amount of principal, plus interest on that principal. This old style CMBS has no prepayment penalties. Assume defaults happen every year before paying interest and principal. No sale for foreclosed houses.

1-Please fill the following table for cash flows if no default or prepayment

2-Please fill the following table for cash flows if two loans default at the end of Year 1 and other four loans default at the end of Year 2. What?s the tranches?

LTV for A and B?

3-Please fill the following table for cash flows if four loans prepay at the end of Year 1 and other four loans prepay at the end of Year 2. Discuss how prepayment affect the return of each tranche.

Transcribed Image Text:

Tranches Par Value Coupon A $50 8% B $20 9% с $30 10% 10 ΝΑ Tranches Par Value Coupon A $50 8% B $20 9% с $30 10% 10 ΝΑ

Answer rating: 100% (QA)

1 Cash flows if no default or prepayment Year 1 Principal A 8 million B 10 million IO 0 Interest A 08 million B 09 million IO 0 Year 2 Principal A 8 million B 10 million IO 0 Interest A 08 million B 09 million IO 0 Year 3 Principal A 8 million B 10 million IO 0 Interest A 08 million B 09 million IO 0 2 Cash flows if two loans default at the end of Year 1 and other four loans default at the end of Year 2 LTV for A and B Since 2 loans default at the end of Year 1 and 4 loans default at the end of Year 2 the LoantoValue LTV ratios for tranches A and B will change Year 1 Principal A 4 million 50 of 8 million B 10 million IO 0 Interest A 04 million 8 of 4 million B 09 million IO 0 Year 2 Principal A 4 million 50 of 8 million B 6 million 60 of 10 million IO 0 Interest A 04 million 8 of 4 million B 054 million 9 of 6 million IO 0 Year 3 Principal A 4 million 50 of 8 million B 6 million 60 of 10 million IO 0 Interest A 04 million 8 of 4 million B 054 million 9 of 6 million IO 0 3 Cash flows if four loans prepay at the end of Year 1 and other four loans prepay at the end of Year 2 Year 1 Principal A 8 million 100 of 8 million B 10 million 100 of 10 million IO 0 Interest A 08 million 8 of 8 million B 09 million 9 of 10 million IO 0 Year 2 Principal A 0 B 0 IO 0 All loans are prepaid Interest A 0 ... View the full answer