tranch A receives the principal interest first than tranch B and than Tranch C… so Tranch C is exposed to a great amount of bad debt risks right? how do they get compensated for it… plus they lock in their funds for a larger period so what’s the additional compensation they receive?? thanks
Tranche B & C will receive higher yields.
Also remember tranche A will face higher prepayment risk compared to Tranche C.
To be clear: all tranches receive their interest. Tranche A gets its principle until it is paid off; until tranche A is paid off, tranche B (and tranche C, and so on) get no principle.
Yes.
The same way _ any _ bond is compensated for higher risk (default or whatever): higher coupon.
You’re welcome.
not all bonds receive their interest. check out countrywide deals circa 2007
Too many defaults?
To CMOs,we may such understand it ,The loans divided three tranchs be offered to different investor .
such as A,B,C.and A first get the principal and interest prior B and C,consequently,C is the last that
get principal and interest.so his risk should be more high.I think the price C purchases the CMOs may
be lower than A and B,because the more risk,the more return demanded.
yup
If there isn’t enough interest to go around, do they give the As all their interest, then the Bs theirs, then what’s left to the Cs, or do they all lose interest proportionally?
If there isn’t enough interest to go around, do they give the As all their interest, then the Bs theirs, then what’s left to the Cs, or do they all lose interest proportionally?
lol i dont know if youre trolliing me or asking legit questions. As have priority so interest and or principal from other groups is used to cover shortfall for the A bonds.
anyways that link i posted is pretty usefull and more clear than most publications
Legit question: I’d never looked seriously at defaults on CMOs.
Thanks.