An associate at Lehman Brothers$$ debt capital market desk prepares a proposal for a collateralized debt obligation $($CDO$)$ issuance for Western Asset Management Company $($Western Asset$).$ Western Asset pulled a portfolio of $$400$ million senior secured bank loans and high$-$yield corporate bonds with an average rating of B$.$ The company wants to sell these loans through a CDO to exploit an arbitrage opportunity in the market.

$1.$ What is the expected rate of return on the $$28$ million Equity tranche?

$2.$ Due to drastically deteriorated economic conditions, $7\%$ of the combined

leveraged loans borrowers and high$-$yield corporate issues defaulted on their loans$/$bonds$.$

What will be the value of the equity tranche in this situation?

$3.$ What are the advantages of securitization for investors? Please provide at least $2$ reasons. What are the disadvantages of securitization for investors? Please provide at least $1$ reason.