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

Quizplus · Accepted Answer

Tranche A pays 5% on a face value of $110 million, so the annual coupon payment is 0.05 x $110 million = $5.5 million.
Tranche B pays 7% on a face value of $90 million, so the annual coupon payment is 0.07 x $90 million = $6.3 million.

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