San Diego State University WAC & COM of the MZ Mortgage Company Questions


Someone to get this problem done for me. Question 1 a-e. I need the work shown so that I can understand it.

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1. The MZ Mortgage Company is issuing a CMO with three tranches. The A tranche will consist of $40.5 million with a coupon
of 8.25 percent. The B tranche will be issued with a coupon of 9.0 percent and a principal of $22.5 million. The Z tranche will
carry a coupon of 10.0 percent with a principal of $45 million. The mortgages backing the security issue were originated at a
fixed rate of 10 percent with a maturity of 10 years (annual payments). The issue will be overcollateralized by $4.5 million,
and the issuer will receive all net cash flows after priority payments are made to each class of securities. Priority
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payments will be made to the class A tranche and will include the promised coupon, all amortization from the
mortgage pool, and interest that will be accrued to the Z class until the principal of $40.5 million due to the A tranche is
repaid. The B class securities will receive interest-only payments until the A class is repaid, and then will receive priority
payments of amortization and accrued interest. The Z class will accrue interest at 10 percent until both A and B classes are
repaid. It will receive current interest and principal payments at that time.
a. What will be the weighted average coupon (WAC) on the CMO when issued?
b. What will be the maturity of each tranche assuming no prepayment of mortgages in the pool?
c. What will be the WAC at the end of year 3? year 4? year 8?
d. If class A, B, and Z investors demand an 8.5 percent, 9.5 percent, and 9.75 percent yield to maturity, respectively, at the
time of issue, what price should MZ Mortgage Company ask for each security? How much will the company receive as
proceeds from the CMO issue?
e. What are the residual cash flows to MZ? What rate of return will be earned on the equity overcollateralization?

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coupon rate




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