Question: Consider a CMBS with the following characteristics (Same as Question 4): Backed by $20M mortgages, 7% interest, 5-yr maturity, IO annual payments, no service fee

Consider a CMBS with the following characteristics (Same as Question 4):

  • Backed by $20M mortgages, 7% interest, 5-yr maturity, IO annual payments, no service fee
  • There are three tranches issued: $13M Tranche A (Senior/Investment Grade CMBS) with coupon rate 5%

$7M Tranche B (Junior/ Non-investment Grade CMBS) with coupon rate 6% IO residual tranche (no extra collateral, but collects extra interest)

Assume no defaults. What is the cash flow to Tranche B in year 5?

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