Question

Consider a CMBS with the following characteristics (Same as Question 4):

• Backed by $20M mortgages, 7% interest, 5-yr maturity, IO annual payments, no service fee
• There are three tranches issued:
  – $13M Tranche A (Senior/Investment Grade CMBS) with coupon rate 5%

– $7M Tranche B (Junior/ Non-investment Grade CMBS) with coupon rate 6% – IO residual tranche (no extra collateral, but collects extra interest)

Assume no defaults. What is the cash flow to Tranche B in year 5?

Answer 1

The CMBS has a maturity period of 5years,

Assuming the interest i paid annually at the end of each year.

The Tranche B has a principal amount of $7M with a coupon rate of 6%.

So, the interest only residual tranche will pay interest at the end of each year till the maturity and principal at the end of the maturity.

Tranche B Interest will be = $7M * 6% = $0.42M

So, at the time of maturity (5^th year) the cash flow will be $7M + $0.42M that will cumulatively be $7.42M.