CFA Level I · CFA Level I Exam · Fixed-Income Securitization
A sequential-pay CMO has Tranche A of 40 million, Tranche B of 30 million and Tranche C of 30 million. In a month the underlying pool generates 6 million of scheduled principal and 9 million of prepayments, all of which goes to Tranche A until retired. After 3 months of identical principal flows, the principal outstanding on Tranche A is closest to:
Tranche A has 0 outstanding. The pool pays 15 million of principal monthly (6 scheduled plus 9 prepayments), so 45 million is available over three months, exceeding Tranche A's 40 million. Tranche A is fully retired and the remaining 5 million goes to Tranche B.
- A0Correct
- B15 million
- C25 million
Explanation
Monthly principal is 6 + 9 = 15 million. Over 3 months, 45 million is paid. Tranche A is only 40 million, so it is retired in the third month, leaving 0 outstanding. The excess 5 million goes to Tranche B. A 25 million answer would result from stopping after 1 month, 40 − 15.
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