Assume there is a $250 million CDO with 3 tranches and the following information:

*All collateral bonds have a fixed rate of 12%

*All collateral bonds mature in 10 years

*Transaction also includes swap with notional of $200 million:

pay fixed = 8% and receive LIBOR

Tranche	Par Value	Coupon Type	Coupon Rate
Senior	$200,000,000	Floating	LIBOR + 40bp
Mezzanine	30,000,000	Fixed	8.5%
Sub/Equity	20,000,000	N/A	N/A

Assume Fees= $1,650,000

Calculate:

(6 pts.) 3a. The net cash flows from the entire transaction, assuming no defaults in the underlying securities.

(1 pt.) 3b. The expected return on the equity tranche, based on the net cash flows and assuming no defaults in the underlying securities.

(8 pts.) 3c. Assume now that there are defaults in the underlying securities of $75,000,000. What will the cash flows (in dollars) to the senior tranche be, assuming that LIBOR = 6%, and that the swap and fees are paid before the senior tranche is paid