Question: We consider a passthrough with a $300 million par amount, a 6% WAC, a 0.8% servicing fee, and a WAM of 20 months. A CMO

We consider a passthrough with a $300 million par amount, a 6% WAC, a 0.8% servicing fee, and a WAM of 20 months. A CMO with four tranches is created using the passthrough: Tranche A ($120 million; 4.4%), Tranche B ($60 million; 4.6%), Tranche C ($45 million; 4.8%), Tranche D (5%) and an IO Tranche (6%). The prepayment speed is 180 PSA.

  1. Compute the monthly cash flows for this passthrough (show the balance, the net interest, the total principal and the total cash flow columns only). Compute the average life (in years).
  2. Assume that the 20-month yield required on similar risk is 6%. What is the Macaulay duration of the passthrough (in years)
  3. Compute the monthly cash flows for all the tranches (A, B, C, D, and IO) in the CMO (show the balance, the net interest, and the total principal columns only). Compute the average life (in years) for tranches (A, B, C and D).

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