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A bank uses its mortgage loans of $600 million as collateral to issue two different trenches...

A bank uses its mortgage loans of $600 million as collateral to issue two different trenches of securities (CMOs) in mortgage markets, Trench A and Trench B. The information is given below. Assume the coupon payment is made annually.

Loan value: $600 million

Interest rate: 6.5%

Maturity: 10 years

CMOs:                          Par value                       Interest rate

Trench A                       $350 million                   4.5%

Trench B                       $250 million                   6.25%

  1. Please estimate the profits from the CMO.

  1. The bank would like to make a profit of $20 million from the CMO by adjusting the interest rate for Trench B. Please estimate what should be the new interest rate.
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