Assume CDO's collateral consists of a pool of non-callable bonds that all mature in 5 years, pays the 5-year US Treasury rate plus100 bps, and has a par value of $80 million. The senior tranche consists of 40% of the pool and pays EOIA (European Overnight Index Average) plus 30 basis points; the mezzanine tranche consists of 35% of the pool and pays the 5-year treasury rate plus 250 basis points. Assuming that none of the bonds in the pool will default, a 5-year Treasury rate at 5%at settlement, and servicing fees of $1M (deducted from the net interest earned by the CDO),the maximum return to the equity tranche closest to:

A). 7.02%
B). 7.20%
C). 8.02%

Answer rating: 100% (QA)

C 802 WORKINGS The average coupon on the pool of noncallab... View the full answer