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Consider a CMBS with the following characteristics: - Backed by $20M mortgages, 7% interest, 5-yr maturity, IO annual payments , no servicer fee - There are three tranches issued: $13M Tranche A (Senior/Investment Grade CMBS) with coupon rate 5% $7M Tranche B (Junior/ Non-investment Grade CMBS) with coupon rate 6% IO residual tranche (no extra collateral, but collects extra interest) Assume no defaults. What is the cash flow to Tranche A in year 1

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Answer:

$650,000 cash flow Tranche A would be received in year 1

Explanation:

The cash flow to Tranche in year 1 is the amount coupon payment receivable by Tranche in the year.

Coupon payment receipt=value of tranche A debt *coupon rate on Tranche A.

Value of tranche A debt is $13 million

coupon rate on Tranche A is 5%

cash flow from tranche in year 1=$13,000,000*5%=$650,000

The amount of $650,000 would be debited to cash account  while the credit would reflect interest revenue account for the year

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