Consider a sequential pay CMO that is backed by 60 mortgages with average balance of $100,000 each. The mortgages have monthly payments with WAM = 15 years and WAC = 4%. There is a servicing fee of 0.6% and prepayment is according to 100% PSA. There are two tranches in this CMO: tranch A issued for $3,000,000 and tranche B issued for $3,000,000. How much cash flow do investors in tranche A receive in the first month?

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2 May, 09:10

Consider a sequential pay CMO that is backed by 60 mortgages with average balance of $100,000 each. The mortgages have monthly payments with WAM = 15 years and WAC = 4%. There is a servicing fee of 0.6% and prepayment is according to 100% PSA. There are two tranches in this CMO: tranch A issued for $3,000,000 and tranche B issued for $3,000,000. How much cash flow do investors in tranche A receive in the first month?

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Cesar Porter · Answer 1

Total cash flows received = $ 34,000

Explanation:

Cash flows received in first month = Servicing fees of 0.6% on the outstanding balance + interest for 1 month on the oustanding balance + repayment of 0.2% of the principal

Outstanding balance of tranche A investors = $3,000,000

Hence service fees received = 0.6% x $3,000,000 = $18,000

Interest for one month = WAC x $3,000,000 x 1 / 12 (Rate x Principal x time in year) = 4% x $3,000,000 x 1 / 12 = $ 10,000

Repayment of 0.2% principla = 0.2% x $3,000,000 = $ 6,000

Total cash flows received = $ 18,000 + $ 10,000 + $ 6,000 = $ 34,000