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

Question

Quizplus · Accepted Answer

In the first month, a total of $7 million is paid out for both interest and principle payments. This leaves $43 million per class ($50 million initial balance - $7 million paid out) for interest payments in the second month. Since this is a three-class CMO, each class receives a pro-rata payment based on their initial principal balance. Therefore, Class A and Class B holders receive interest on $28 million each ($43 million balance * 2/3 and 1/3, respectively). Class C holders would receive interest on the remaining $15 million. Therefore, the answer is D, with Class A holders receiving interest on $28 million and Class B holders receiving interest on $30 million.

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