A. Suppose the second last (12.7+ million) and last (76.7+ million) "mortgage loans" in loan group 1 in the nationwide Alternative Trust 2005-J7 (p S-69), posted with this assignment.
1. Amortize both loans with a100% PPC supposition as given on p. S-70, and a 100% SDA (this is now the base PP/D assumption; leave the factors open to change). To make simpler, suppose that any default is realized instantaneously and that there is no recovery. Also make the standard assumption that default happens before mortgage payment, prepayment after.
2. Prepare a WAC IO and PO tranche to give a 5.75% deal coupon. Suppose that these two classes are paid first (before subs and seniors - see below). The WAC PO gets the aggregate (initial PO%) × (total principal cash flow), the WAC IO the aggregate excess interest on outstanding, present premium loan balance.
3. With the remaining assets, generate a senior/sub structure with 5% subordination, and a shifting interest structure as given on p S-61, under "shift percentage." Take a percentage of, for example, 60% to mean that the sub receives only 60% of its prorated prepay principal (provided the sub still exists). The sub may be a single class (called "B") that absorbs all realized losses first. Once the sub is exhausted, all seniors (see below) are allocated losses on a prorated basis. Suppose interest is paid to the aggregatesenior classes at 5.75%and any remaining interest is distributed to the sub (which is to sell at discount).
4.Create a PAC class (A-1) with an initial collar of 50%-200% PPC, assuming base case defaults. The remainder of the senior class serves as a support bond (A-2). A-1 and A-2 together constitute the senior class. Prorate potential senior losses to A-1 and A-2 based on pre-default principal; assign each class its interest payment prorated on post-default beginning balance.
5. Suppose all classes sold to give the subsequent cash flow yields under the base PP/D assumption: A-1: 4.50%; A-2: 5.5%; B: 9%; IO: 6%; PO: 5.75%.Theseinitial prices givethe date 0 CF for each tranche, and evaluate the CF yields when the PP/D assumptions are changed. Thus, we pretend the tranches are bought at the initial (baseline assumption) prices, and then the PP/D instantly changes for the rest of the CFs.
6. Make reasonable assumptions for any missing information, and justify them. Beware that you may only think the information is missing.