CMO - Sequential Pay Tranche (please help!)

CFA Level II Fixed Income
#1

On pg 414, the example (and Exhibit 6), the How you do calculate the principal payment?

The collateral for this hypothetical CMO is a hypothetical passthrough with a total par value of $400 million and the following characteristics: 1) the passthrough coupon rate is 7.5%, 2) the weighted average coupon (WAC) is 8.125%, and 3) the weighted average maturity (WAM) is 357 months.

All WACs are 7.5%

Tranche A - $194,500,000 Tranche B - 36,000,000 Tranche C - 96,500,000

Tranche D - 73,000,000

Year 1) Tranche A

Balance: 194,500,000

Interest = 194,500,000/400,000,000 = (194,500,000*.075) /12 = 1,215,625

Principal is given as $709,923 (I don’t know where this comes from - can’t figure it out)

#2

Hi,

I suppose thats given in the “amortization schedule” already… The amount is mentioned for us to understand how each tranche gets paid out and stuff… The principal amount consists of the repayment and the prepayment amount (based on PSA) calculated by the issuer.

Correct me if I am wrong.

#3

Assuming no prepayments?

#4

Prepayments are given to be based on 165PSA. You have to compute the scheduled principal payment and also prepayment (for which you have to compute SMM). The problem does not mention the collateral stated maturity and hence cannot compute principal payment - you can just assume 360 months - but that does not seem to be working with the numbers.

#5

Hopefully it’s just given. I’m seeing no formulas or anything for calculating

#6

Do you have the Elan package? He goes through this example and that principal amount seems familiar.

I will take a look when I get a chance

#7

whhats PAC 2 tranche ?

#8

It’s a PAC tranche that’s part of the support structure for a PAC I tranche. It will have a narrower band of prepayment speeds under which it maintains its amortization schedule than the PAC I tranche it supports, so it has more extension and contraction risk than a PAC I tranche.

#9

s2000 so its like junior PAC?

It is better than rest of support tranches?

#10

I’d imagine that it’s like a junior PAC. A PAC I has the greatest protection against extension and contraction (the widest prepayment band), a PAC II has less protection against extension and contraction (a norrower prepayment band), a PAC III has less protection, and so on.

That depends on what you mean by “better”. It has less extension and contraction risk than other support tranches, but that comes at a price: a lower coupon rate. You pays your money and you takes your chances.