Weighted Average Coupon Assignment | Homework For You

The MZ Mortgage Company is issuing a CMO with three tranches. The A tranche will consist of $27 million with a coupon of 9.25 percent. The B tranche will be issued with a coupon of 10.0 percent and a principal of $15 million. The Z tranche will carry a coupon of 11.0 percent with a principal of $30 million. The $75 million mortgages backing the security issue were originated at a fixed rate of 11 percent with a maturity of 10 years (annual payments). The issuer will receive all net cash flows after priority payments are made to each class of securities. Priority payments will be made to the class A tranche and will include the promised coupon, all amortization from the mortgage pool, and interest that will be accrued to the Z class until the principal of $27 million due to the A tranche is repaid. The B class securities will receive interest only payments until the A class is repaid, and then will receive priority payments of amortization and accrued interest from tranche Z. The Z class will accrue interest at 11.0 percent until both A and B classes are repaid. Then tranche Z will receive coupon interest and principal payments from the mortgage pool at that time. The loan schedule for the mortgage pool (in thousands) is as follows:

Year Beg. Bal Payment Interest Principal End Bal Prepayment
1 $75,000.00 $12,735.11 8,250.00 $4,485.11 $70,514.89 0.00
2 70,514.89 $12,735.11 7,756.64 $4,978.47 $65,536.42 0.00
3 65,536.42 $12,735.11 7,209.01 $5,526.10 $60,010.32 0.00
4 60,010.32 $12,735.11 6,601.14 $6,133.97 $53,876.35 0.00
5 53,876.35 $12,735.11 5,926.40 $6,808.71 $47,067.64 0.00
6 47,067.64 $12,735.11 5,177.44 $7,557.67 $39,509.98 0.00
7 39,509.98 $12,735.11 4,346.10 $8,389.01 $31,120.97 0.00
8 31,120.97 $12,735.11 3,423.31 $9,311.80 $21,809.17 0.00
9 21,809.17 $12,735.11 2,399.01 $10,336.10 $11,473.07 0.00
10 11,473.07 $12,735.11 1,262.04 $11,473.07 $0.00 0.00


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a. What will be the weighted average coupon (WAC) on the CMO when issued?

b. Please list the annual cash flows to tranche A investors for the ten years period.

c. Please list the annual cash flows to tranche B investors for the ten years period.

c. Please list the annual cash flows to tranche Z investors for the ten years period.

e. What are the annual residual cash flows to MZ for the ten years period?

f. How much is the overcollateralization of CMO when issued? Why are CMOs overcollateralized? Get Finance homework help today