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

question 53

Multiple Choice

The following information is for a collateralized mortgage obligation (CMO) .Tranche A has a face value of $110 million and pays 5 percent annually.Tranche B has a face value of $90 million and pays 7 percent annually.

What are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal. )

• A) $5.5 million on Tranche A and $6.3 million on Tranche B.
• B) $5.5 million on Tranche B and $6.3 million on Tranche A.
• C) A total of $12 million on both Tranche A and B.
• D) $4.5 million on Tranche A and $7.7 million on Tranche B.
• E) $4.5 million on Tranche B and $7.7 million on Tranche A.

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Definitions:

Decision Alternatives

Possible actions or choices available to decision-makers in a decision-making process.

Opportunity Loss

The loss of potential gain from other alternatives when one alternative is chosen.

Decision Maker's Profit

Reflects the gains realized by a decision maker after considering all costs and revenues associated with their decision.

Expected Monetary Value(EMV)

A financial concept used in decision-making to calculate the average outcome of future events, taking into account the probabilities and impacts of various possible outcomes.