A Collateralized Debt Obligation (CDO) is issued from Eazee Mortgages with 3 tranches. The first Tranche (A) has $30 million and pays a coupon of 6%. The second Tranche (B) has $20 million with a coupon of 7%. The third Tranche (Z) has $25 million with a coupon of 8%. The overcollateralization on the CDO is $5 million and mortgages backing the issue have a fixed rate of 8% for 5 years. Priority payments will be made to Tranche A that includes its coupon payments all mortgage pool amortization and the interest accrued to Z class until the Tranche A principal has been repaid. Tranche B will receive interest only payments until Tranche A is repaid. Once Tranche A is repaid, Tranche B will receive priority payments of accrued interest and amortization. Tranche Z will accrue interest at 8% until both Tranches A and B are repaid, after which it will receive current interest and principal payments.
a) Calculate the CMO’s weighted average coupon at the time of issue.
b) If there are no prepayments, what is the maturity of each Tranche (A, B, Z).
c) What is the weighted average coupon at the end of year 2 and Real Estate Finance.