VARA QUESTION FOUR a) Consider the following CMO structure backed by 8% collateral. dos e end o: Tranche Par Amount Coupon rate A 400,000,000 6.25% B 200,000,000 6.75% 225,000,000 7.50% D 175,000,000 7.75% Required: Suppose that the structure of this Cmo wants to create a notional 10 tranche with a coupon rate of 8%. Calculate the notional amount for this notional 10 tranche. (10 marks) b) Assume the following structure of a CMO Tranche A B Par Amount 100,000,000 50,000,000 96,500,000 73,500,000 320.000.000 Coupon rate 7.5% 7.5% 7.5% 7.5% D Total Suppose tranche C is split to create a floater with a principal of Kshs.80,416,667 and an inverse floater with a principal of Kshs. 16,083,333 Required: i) What would be the cap rate for the inverse floater if the coupon rate for the floater is 1-month libor plus 1%. (10 marks) ii) Assuming that (1) the coupon formula for the floater is 1-month libor plus 1% and (2) a floor is imposed on the inverse floater of zero, what would be the cap rate on the floater