Calculate the expected Return on Equity for the equity tranche in the first two years of 4year CLO.

Information:

• $1 billiondollar pool
• Feeare2%ofFVineachyearandarepaidtheendoftheyear
• Recovery fromdefaults is invested at 5%. It is invested immediately.
• The defaults occur at the beginning of the second-half of each year.
• The annual interest on the pool of loans (i=8%) is paid semiannually and is based on the remaining balance of loans in the pool.
• Losses are not reduced fromequity until the end of the CLO.

Year 1: Default 3% / Recovery 60%

Year 2: Default 8% / Recovery rate 40%

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