A three-class sequential pay CMO has an initial principal balance of $50 million per class. In the first month,interest payments of $5 million and principal payments of $2 million are received. In the second month,Class A holders receive interest on _____ principal and Class B holders receive interest on _____ principal.

Question

Quizplus · Accepted Answer

In a sequential pay CMO, Class A receives all principal payments until it is fully paid off. Therefore, in the first month, the $2 million principal payment is allocated entirely to Class A. This reduces the Class A balance to $48 million and leaves Class B and Class C with $50 million each.

In the second month, Class A interest is calculated on the reduced balance of $48 million, while Class B and Class C interest is calculated on the unchanged balance of $50 million each. Therefore, Class A receives interest on $48 million principal and Class B and Class C receive interest on $50 million each.

Hence, the answer is D: $28 million for Class A and $30 million for Class B.

A Three-Class Sequential Pay CMO Has an Initial Principal Balance