Question

A Collateralized Mortgage Obligation has a $50 million pool of mortgages with a weighted average coupon payment of 4.00% (net of all fees such as servicing and Trust fees). It has 3 tranches listed below. What is the coupon payment that would be paid to the “equity” tranche?

Super-Senior AAA, $37.5 mil. (75% of the pool)                        2.15% Coupon

Mezzanine BBB, $10.0 million (20% of the pool)                       3.30% Coupon

Equity Unrated, $2.5 million (5% of the pool)                       ______% Coupon

Answer 1

WACC = Sum of weights*Rates

4% = 75%*2.15%+ 20%*3.3%+ 5%*Ke

4% = 2.2725%+5%*Ke

Ke = 1.7275%/5% = 34.55%

Coupon payment that would be paid to the “equity” tranche = 34.55%