CMO security offering with sequential annual pay tranches
			coupon rate	amount issued
Mortgage pool
Mortgages	$100,000,000	Class A Bonds	3.00$	$30,000,000
6% interest rate		Class B Bonds	4.25%	$30,000,000
10 year maturity		Class Z Bonds	5.50%	$30,000,000
		Total bonds		$90,000,000
Total assets	$100,000,000	Equity contribution by issuer		$10,000,000
		Total debt and equity		$100,000,000
Rules of cash distributions to A, B and Z: interest is paid currently on tranches A and B, but it is not paid on tranche Z until principal on the other tranches is repaid. For tranche Z, interest will be accrued and accumulated into the investment balance. In addition, to ensure that the maturity of tranche A securities is kept relatively short, the interest accrued to tranche Z and all current principal and prepayments from the entire mortgage pool will be allocated to tranche A, and then to tranche B.

Questions

1. [7 points] Suppose that there are no prepayment and no default, what are the cash flows for Class A, Class B and Class Z bonds? What is the IRR for the issuer?

2. [8 points] Suppose that there are 15% prepayment and no default, what are the cash flows for Class A, Class B and Class Z bonds? What is the IRR for the issuer?