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

question 68

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.
-If at the end of the first year, the CMO trustee receives total cash flows of $15 million, how are they distributed?

• A) $7.5 million to Tranche A and $7.5 million to Tranche B.
• B) $15 million to Tranche A and nothing to Tranche B.
• C) $5.5 million to Tranche A and $9.5 million to Tranche B.
• D) $8.7 million to Tranche A and $6.3 million to Tranche B.
• E) $7.1 million to Tranche A and $7.9 million to Tranche B.

---

Definitions:

Investment

The allocation of resources (such as capital) to assets with the expectation of generating future profit or income.

Intrinsic Value

The actual value of a company or an asset based on underlying perceptions of its true value including aspects of both tangible and intangible factors.

Present

The current moment in time, often used as a reference point in discussions about time value of money.

Compounding

The process by which an investment generates earnings from previous earnings, leading to the exponential growth of the investment value over time.