A three-class sequential pay CMO has an initial principal balance of $30 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 the first month, the total payment received is $7 million ($5 million interest + $2 million principal). This means that $21 million ($30 million - $7 million) of principal is left to be paid in the next months equally across all three classes. 
In the second month, each class will receive interest on their remaining principal balance. 
Class A: $28 million ($30 million - $2 million principal payment in first month)
Class B: $28 million ($30 million - $2 million principal payment in first month)
Class C: $21 million (no principal payment in first month, so remaining principal balance is still $30 million)

Therefore, 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