A CMO has two tranches. Tranche A has a principal value of $120 million and pays 5 percent annually. Tranche B has a principal value of $100 million and pays 7 percent annually
i) If at the end of the first year, the CMO trustee receives total cash flows of $36 million, how are they distributed?
ii) If in the second year, the CMO trustee receives the same cash flows of $36 million, how are they distributed?
iii) Now assuming that at the beginning of the 5th year, Tranche A has $20 million principal outstanding, and the CMO trustee receives total cash flows of $36 million, how are they distributed?