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. 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. 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?