Crunk Times, My friend.....Crunk Times

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Consider the following basic $150 million CDO structure with the coupon rate to be offered at the time of issuance as shown:


Tranche Coupon Par Value Coupon Rate

Senior $100,000,000 LIBOR + 50 basis points

Mezzanine $ 30,000,000 Treasury rate + 200 basis points

Subordinated/Equity $ 20,000,000

Assume the following:

• The collateral consists of bonds that all mature in 10 years.

• The coupon rate for every bond is the 10-Treasury rate plus 300 basis points.

• The collateral manager enters into an interest-rate swap agreement with another party with a notional amount of $100 million.

• In the interest-rate swap the collateral manager agrees to pay a fixed rate each year equal to the 10-year Treasury rate plus 100 basis points and receive LIBOR.

(a) Why is an interest-rate swap needed?

(b) What is the potential return for the subordinated/equity tranche assuming no defaults?

© Why will the actual return be less than the return computed?
Sternocleidomastoid syndrome?

 
Oh hey flip, if ya read this... I tried to send you registry cleaner today on gmail, but I didnt know that gmail was now scanning zip files for executables and doesnt allow emailing them anymore.

I find that pretty fucking gay.

 
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