The Following Information Is for a Collateralized Mortgage Obligation (CMO)

question 86

Multiple Choice

The following information is for a collateralized mortgage obligation (CMO) .Tranche A has a face value of $50 million and pays 6 percent annually.Tranche B has a face value of $50 million and pays 8 percent annually.All mortgages have maturities of 30 years. What are the principals outstanding on Tranches A and B, respectively, after the CMO distributes the $10 million of cash flows?

• A)$50 million; $47 million.
• B)$47 million; $50 million.
• C)$48 million; $48 million.
• D)$50 million; $48 million.
• E)$50 million; $50 million.

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Definitions:

Novation

A legal process where an old debt, obligation, or contract is replaced by a new one, effectively extinguishing the original agreement and substituting it with a new party or terms.

Obligor

An Obligor is the party in a contractual agreement who is bound to provide a specified performance to another party, the obligee.

Obligee

The party in a contractual agreement who is owed a duty or obligation by another party, the obligor.

Third-Party Donee Beneficiary

A person who benefits from a contract between two other parties, although they are not one of the contract's signatories.