How much of the $1,200,000 is distributed to the senior class?
What will be an ideal response?
Allocation of the prepayments of $1,200,000 is based on the senior prepayment percentage
(in some deals called the accelerated distribution percentage). This is defined as follows:
Senior prepayment percentage + (Shifting interest percentage × Subordinate interest)
The "shifting interest percentage" in the formula above is specified in the prospectus. For our problem, the senior interest is 75%, the subordinate interest is 25%, and the shifting interest percentage is 85%. Inserting in our numbers for the above definition give the senior prepayment percentage for the month as: 75% + 0.85 × 25% = 96.25%.
If prepayments for the month are $1,200,000 and the senior prepayment percentage for that month (as just computed) is 96.25% or 0.9625, then 0.9625 × $1,200,000 = $1,155,000 is allocated to the senior bond class and $1,200,000 – $1,155,000 = $45,000 to the subordinated bond class.
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