A Three-Class (Class A,B,and C)sequential Pay CMO Starts with an $80

question 6

Essay

A three-class (Class A,B,and C)sequential pay CMO starts with an $80 million principal amount in each class. The mortgages in the pool have a 7 percent interest rate. The CMO classes receive monthly payments. During the first month,$1 million in interest is received from mortgage holders and $1.5 million in principal. What principal amounts are outstanding for each class during the second month? How will this affect the total payment each class receives? Explain.

---

Definitions:

Net Operating Income

The profit a company generates from its core business operations, excluding deductions of interest and tax.

Absorption Costing

An approach in accounting that integrates all costs associated with manufacturing, including direct materials, direct labor, and both variable and fixed overhead, into the product’s price.

Net Operating Income

A company's revenue minus its operating expenses, not including taxes and interest charges, indicating the profitability of its core business activities.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production or sales, such as salaries of managers, depreciation of manufacturing equipment, and rent of the factory building.