For supplied answers please note either A B or C for each of

For supplied answers, please note either \"A\", \"B\", or \"C\" for each of parts 6-10 -- Thank you.

Solution

6). Notional for 8.5% IO = Tranche par value * Excess Interest

.085 (Collateral)

Tranche A = 400,000,000 * (8.5% - 6.75%)

  .085

= 82,352,941.18

Same formula appleid to tranch B,C and D and summ all the Notional arrived using the above formula

Answer = 217,647,057

7). Next Coupon Payment = Coupon rate cap – (coupon leverage)(reference rate)

= 28.5% - (4* 4.2%) = 11.7%

8). Credit Risk

9). The PAC Bond.

10). Mitigate the uncertainity in cashflows due to prepayment risk.