A simple collateralised debt obligation (CDO) is securitised from a pool of mortgage loans and corporate loans with face value 5 million and overall rate of return of 5.5%. The sizes of the senior tranche, mezzanine tranche and equity tranche are given by 55%, 30% and 15% respectively. The promised interest to the senior tranche and the mezzanine tranche are 4.5% and 6% respectively.

A risk analyst at WBS Financial Services estimated that the default rate of the loans would reach 26% by the end of June 2021.

1. Given the information above, calculate the total return and expected loss in principal for each tranche.

(10 marks)