Question

Sequential Pay security

This question is based on the following CMO:

-100 residential loans, average starting loan balance $250,000

-10 year FRMs with annual payments, WAC 4.25%

-Assume 0 prepayment

Now, suppose than instead the CMO was structured as a sequential pay security. There is $5,000,000 of principal allotted to the A Tranche, which has a coupon rate of 3.00%, $7,500,000 of principal allotted to the B Tranche, which has a coupon rate of 3.75%, $10,500,000 of principal allotted to the Z (accrual) Tranche, which has a coupon rate of 4.25%. The issuer (residual) will receive cash flows after payment rules to other classes are satisfied.

The payment rules are as follows:

Priority payments will be made to the A tranche and the A class will be first to receive their promised coupon payment.

The B class will receive interest payments only until the A class is repaid. In addition to interest, A will receive priority payments toward principal in the amount of sum of principal repayment by the pool and the interest accrued to Z in that period. After A is repaid, B then will receive priority payments of amortization and accrued interest according the same rules as A. The Z class will accrue interest until both A and B are repaid. Z will receive current interest and principal payments at that time according to the same rules as A and B. All cash flows from the pool that are not designated by the above rules will go to the residual class in that period.

CFs to pool:

Time (in years)	Start Balance	Payment	Interest	Principal	End Balance
1	$25,000,000.00	$3,120,753.04	1,062,500.00	$2,058,253.04	$22,941,746.96
2	22,941,746.96	$3,120,753.04	975,024.25	$2,145,728.80	$20,796,018.16
3	20,796,018.16	$3,120,753.04	883,830.77	$2,236,922.27	$18,559,095.89
4	18,559,095.89	$3,120,753.04	788,761.58	$2,331,991.47	$16,227,104.42
5	16,227,104.42	$3,120,753.04	689,651.94	$2,431,101.11	$13,796,003.31
6	13,796,003.31	$3,120,753.04	586,330.14	$2,534,422.90	$11,261,580.41
7	11,261,580.41	$3,120,753.04	478,617.17	$2,642,135.88	$8,619,444.53
8	8,619,444.53	$3,120,753.04	366,326.39	$2,754,426.65	$5,865,017.88
9	5,865,017.88	$3,120,753.04	249,263.26	$2,871,489.78	$2,993,528.10
10	2,993,528.10	$3,120,753.04	127,224.94	$2,993,528.10	$0.00

What is the balance of Tranche B at the end of year 1? Round to the nearest dollar.

Answer 1