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.

What are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal. )
A) $5.5 million on Tranche A and $6.3 million on Tranche B.
B) $5.5 million on Tranche B and $6.3 million on Tranche A.
C) A total of $12 million on both Tranche A and B.
D) $4.5 million on Tranche A and $7.7 million on Tranche B.
E) $4.5 million on Tranche B and $7.7 million on Tranche A.

Question

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.

What are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal. )

What are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal. )
A) $5.5 million on Tranche A and $6.3 million on Tranche B.
B) $5.5 million on Tranche B and $6.3 million on Tranche A.
C) A total of $12 million on both Tranche A and B.
D) $4.5 million on Tranche A and $7.7 million on Tranche B.
E) $4.5 million on Tranche B and $7.7 million on Tranche A.

Quizplus · Accepted Answer

For Tranche A: 
Coupon payment = Face value * coupon rate = $110 million * 0.05 = $5.5 million

For Tranche B: 
Coupon payment = Face value * coupon rate = $90 million * 0.07 = $6.3 million

Therefore, the annual coupon payments promised to Tranche A and B are $5.5 million and $6.3 million, respectively.

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