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interest to each tranche on the basis of the amount of principal outstanding at the beginning of the period. 2. 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 prin- cipal payments to tranche B until it is completely paid off. After tranche B is com- pletely 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. In Deal 1, each tranche receives periodic coupon interest payments based on the amount of the outstanding balance. The disbursement of the principal, however, is made in a special way. A tranche is not enti- tled to receive principal until the entire principal of the tranche before it has been paid off. More specifically, tranche A receives all the principal payments until the entire principal amount owed to that tranche, $194,500,000, is paid off; then tranche B begins to receive principal and continues to do so until it is paid the entire $36,000,000. Tranche C then receives principal, and when it is paid off, tranche D starts receiv- ing principal payments. While the payment rules for the disbursement of the principal pay- ments are known, the precise amount of the principal in each period is not. This will depend on the cash flow, and therefore principal pay- ments, of the collateral, which depends on the actual prepayment rate of the collateral. An assumed PSA speed allows the monthly cash flow to be projected. Exhibit 9.1 shows the monthly cash flow (interest, regu- larly scheduled principal repayment, and prepayments) assuming 165 PSA. Assuming that the collateral does prepay at 165 PSA, the cash flows available to all four tranches of Deal 1 will be precisely the cash flows shown in Exhibit 9.1. To demonstrate how the payment rules for Deal 1 work, Exhibit 9.3 shows the cash flow for selected months assuming the collateral prepays at 165 PSA. For each tranche, the exhibit shows: (1) the balance at the end of the month, (2) the principal paid down (regularly scheduled prin- cipal repayment plus prepayments), and (3) interest. In month 1, the cash flow for the collateral consists of a principal payment of $709,923 and interest of $2.5 million (0.075 times $400 million divided by 12). The interest payment is distributed to the four tranches based on the amount of the par value outstanding. So, for example, tranche A receives $1,215,625 (0.075 times $194,500,000 divided by 12) of the $2.5 million. The principal, however, is all distributed to tranche A. Therefore, the cash flow for tranche A in month 1 is $1,925,548. The principal balance at the end of month 1 for tranche A is $193,790,076 (the original principal balance of $194,500,000 less the principal pay- ment of $709,923). No principal payment is distributed to the three other tranches because there is still a principal balance outstanding for tranche A. This will be true for months 2 through 80.
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