time tranching continued

Question

How would you do the sequential losses for this example from the CFA institute? Would it be the same? A first, then B, then C? Exhibit 3CMO-01: Sequential-Pay CMO Structure with Four TranchesTranche Par Amt couponA 389 5.5%B 72 5.5C 193 5.5D 146 5.5Payment rules: For payment of monthly coupon interest: Disburse monthly coupon interest to each tranche on the basis of the amount of principal outstanding for each tranche at the beginning of the month. For disbursement of principal payments: Disburse principal payments to Tranche A until it is completely paid off. After Tranche A is completely paid off, disburse principal payments to Tranche B until it is completely paid off. After Tranche B is completely paid off, disburse principal payments to Tranche C until it is completely paid off. After Tranche C is completely paid off, disburse principal payments to Tranche D until it is completely paid off.Remember that a CMO is created by redistributing the cash flows—interest payments and principal repayments—to the various tranches on the basis of a set of payment rules. The payment rules at the bottom of Exhibit 3 describe how the cash flows from the mortgage pass-through security are to be distributed to the four tranches. CMO-01 has separate rules for the interest payment and the principal repayment, the latter being the sum of the scheduled principal repayment and the prepayments.

hairyfairy · Answer

So as per your other question, credit tranches and prepayment tranches doesn't necessarily have to be the same. Tranche A principal is paid first, but it could just be that Tranche A investors want a shorter repayment timeline.In the absence of any extra information I would say credit tranches follows prepayment tranches (i.e. A,B,C,D) given the coupon rate is the same across the board.