Assume no servicing fees and prepayment

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Reference no: EM131060742

Given the following information, what is the IRR of the residual? (Round your answer to 2 decimal places- if your answer was ten and half percent, enter 10.50)

Assume no servicing fees and prepayment=CPR 10%

A CMO is being issued with 3 tranches. The A tranche will consist of $100M of principal and have a coupon of 5%. The B tranche will have a coupon of 5.75% and a principal of $57.5M. The Z tranche will carry a coupon of 6.5% with a principal of $70M. The mortgages backing the security issued are FRM at 6.7% with 10 year maturities and annual payments (for simplicity). The issue will be overcollateralized by $7.5M and the issuer (residual) will receive cash flows after payment rules to other classes are satisfied.

Priority payments will be made to the A tranche and the A class will be first to receive their promised coupon payment. The B class will receive interest payments only until the A class is repaid. In addition to interest, A will receive priority payments toward principal in the amount of sum of principal repayment by the pool and the interest accrued to Z in that period. After A is repaid, B then will receive priority payments of amortization and accrued interest according the same rules as A. The Z class will accrue interest at 6.5% until both A and B are repaid. It will receive current interest and principal payments at that time according to the same rules as A and B. All cash flows from the pool that are not designated by the above rules will go to the residual class in that period.

Reference no: EM131060742

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