2.Assume there is a$250 million CDO with 3 tranches and the following information:

*All collateral bonds have a fixed rate of 12%

*All collateral bonds mature in 10 years

*Transaction also includes swap with notional of $200 million:

pay fixed =8% and receive LIBOR

Tranche Par Value Coupon Type Coupon Rate

Senior $200,000,000 . Floating LIBOR + 40bp

Mezzanine 30,000,000 Fixed 8.5%

Sub/Equity . 20,000,000 N/A N/A

Assume Fees= $1,650,000

Calculate:

2a.The net cash flows from the entire transaction, assuming no defaults in the underlying securities.

2b.The expected return on the equity tranche, based on the net cash flows and assuming no defaults in the underlying securities.

2c.Assume now that there are defaults in the underlying securities of $75,000,000.What will the cash flows (in dollars) to the senior tranche be, assuming that LIBOR = 6%, and that the swap and fees are paid before the senior tranche is paid?