Calculate how much money each Tranche will receive/TUTORIALOUTLET DOT Calculate how much money each Tranche will receive

Calculate how much money each Tranche will receive
FOR MORE CLASSES VISIT
www.tutorialoutlet.com
You have been assigned to calculate how much money each Tranche
will receive. There are 10 mortgages in a pool. Each mortgage has a
value of $10,000,000 for a total pool of $100,000,000. Each
mortgage is an interest only mortgage paying a 6% interest rate. Half
of the mortgages will mature this year and half of them will mature
next year. An A Tranche has been established with a par of
$75,000,000 and a coupon of 4%. A B Tranche has been established
with a par of $25,000,000 and a coupon of 6%. Finally, an Interest
Only Tranche has also been established. 3 mortgages default after the
first year. Investors will only recover half of the value of each of
these 3 mortgages.
1. Calculate scheduled and received cash flows for each Tranche and
the Pool as a whole for both
years.
(20 points)
2. Explain why Tranche A has a lower coupon rate than Tranche
B.
(5 points)
3. Explain how an Interest Only Tranche can be created and why this
is the only bond in the world that’s value goes down as interest rates
go down.