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Same as Question 4, consider a CMBS with the following characteristics: - Backed by $20M mortgages, 7% interest, 5-yr maturity, IO annual payments , no servicer fee - There are three tranches issued: $13M Tranche A (Senior/Investment Grade CMBS) with coupon rate 5% $7M Tranche B (Junior/ Non-investment Grade CMBS) with coupon rate 6% IO residual tranche (no extra collateral, but collects extra interest) Now consider a situation where there is a recession in year 5. The SPV/issuer is only able to collect payments and sell the underlying collateral for a total of $18M. In other words, it only has $18M to disburse to its investors in year 5. In this scenario, what is the cash flow to Tranche B in year 5

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Answer:

The cash flow to Tranche B in year 5 is the residual balance of $5 million and $420,000 i.e $5,420,000

Explanation:

In year five,the $18 million received from the sale of underlying assets means that Tranche would receive its value of $13,000,000 while the balance of $5,000,000 is the amount attributable to tranche B.

In to the $5,000,000,interest receivable of $420,000  ($7,000,000*6%),in other words,total cash flow of Tranche B is $5,420,000($7,000,000+$420,000)

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