A CDO of $ million notional value with five year maturity has the following structure respectively: Tranche, Size million Spread bps OC target, IC target

A

B

C

Equity million size but no spread, OC or IC target

The CDO collateral has an average annual coupon rate of payable semiannually.

The CDO manager charges a deal structuring fee of bps of the notional amount

amortized over the life span of the CDO at per annum. The yearly manager fee is

bps for the senior tranche and bps for the subordinated tranches. The current risk free

interest rate is on a BEY basis.

i If there is no default, find the semiannual cash flow distributions to deal restructuring

fees, asset manager fees, payments to tranches A B and C and payment to equity

tranche. Calculate the OC and IC ratios for tranches A B and C Are these ratios

above their target levels?

ii Assume the collateral portfolio loses $ million before the first coupon payment

date. Redo all of the calculations in part bi above. Are the OC and IC ratios for

tranches A B and C above their target levels? If not, how should we adjust?