FRM Part I · FRM Exam Part I · Credit Risk Transfer Mechanisms
A CDO's collateral pool yields a weighted average coupon of 7.0% on $200 million. Notes issued: $160 million senior at 5.0%, $30 million mezzanine at 8.0%, and $10 million equity. Ignoring fees and defaults, what is the annual excess cash flow to the equity tranche, in $ million?
The equity tranche receives $3.6 million per year. Collateral generates $14.0 million of interest, while the senior notes cost $8.0 million and the mezzanine notes cost $2.4 million. The residual after paying both is the excess cash flow that goes to equity.
- A3.6Correct
- B1.2
- C14.0
- D5.0
Explanation
Collateral interest is 0.07 x 200 = 14.0. Senior interest is 0.05 x 160 = 8.0. Mezzanine interest is 0.08 x 30 = 2.4. Equity receives 14.0 - 8.0 - 2.4 = 3.6. The 1.2 figure results from using the wrong mezzanine amount.
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