Compute the principal and interest cash flows

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1. Consider a simple sequential-pay CMO structure below:

Tranche Annual Coupon Rate Par Outstanding

A 6% $3 million

B 7% $8 million

C 8% $30 million

The CMO's payment rule calls for monthly coupon interest to be distributed to each tranche based on the amount of principal outstanding for each tranche at the beginning of the month. All principal payments will be dispersed to Tranche A until it is completely paid off. After Tranche A is paid in full, principal will go to Tranche B until it is completely paid; after Tranche B is paid in full, Tranche C will begin to receive principal payments.

The portfolio manager has estimated the projected principal payments (scheduled principal plus estimated prepayments) from the collateral for the next two months as:

Month 1: $520,000

Month 2: $510,000

Compute the principal and interest cash flows for each of the three tranches for months 1 and 2

Reference no: EM132703740

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