1.Assume there are a bunch of mortgages that are supposed to pay principal payments and interest payments of $2100
during the year are pooled together and sold as securities. These securities have tranches which include I II III and IV. Tranche I is supposed to collect
$1000 in principal tranche II is supposed to collect $500 in principal tranche III is supposed to collect $300 in principal and Tranche IV is supposed to
collect $200 in principal. Tranche IV has the highest yield assuming that all principal is paid. The annual total interest cost is $100 and this is paid
before principal is paid to any of the tranches.
Assume that homeowners default on their mortgages and they only pay $1200 during the year. How much does tranche II
collect in principal?