# CDO Q from CFAi End of Chapter Q's

V5, p.280, #36 SCENARIO: Consider the following CDO transaction: 1.) The CDO is a \$200MM structure. That is, the assets purchased will be \$200MM. 2.) The collateral consists of bonds that all mature in 8 years and the coupon rate for every bond is the 8-year Treasury rate plus 600 basis points. 3.) The senior tranche comprises of 75% of the structure (\$150MM) and pays interest based on the following coupon formula: LIBOR + 90bps. 4.) There is only one junior tranche (\$30MM) with a coupon rate that is fixed. The coupon rate is the 8-year Treasury rate plus 300 bps. 5.) The asset manager enters into an agreement with counterparty in which it agrees to pay the counterparty a fixed rate each year equal to the 8-year Treasury rate + 120 bps and receive LIBOR. The notional amount of the agreement is \$150MM. ------------------------------------------------------------------------------------------------------------------ QUESTIONS: A.) How much is the equity tranche in this CDO? B.) Assume that the 8-year Treasury rate at the time the CDO is issued is 6%. Assuming no defaults, what is the cash flow for each year and how is it distributed? C.) Ignoring the asset management fee, what is the amount available each year for the equity tranche? This is a toughie, and the answers all boil down to absolute numbers, no variables. Look in the back of the book for the answers to B and C, they’re too long for me to type.

I am drawing a complete blank here.

4 minutes? This may be the AF record?

It’s a difficult one, but really helps you work through the fundamentals.

i’ll take 20 for part A and the rest… i’m toast.

yeah it would be 20 for part A…

So far so good, and to get there that’s: \$200MM Total Assets - \$150MM Senior Debt - \$30MM Junior Debt = \$20MM Equity

Noone’s even gonna take a shot at B&C? Kabii?

would we start to take each tranche like the 30 mil jr tranche x .09% (the t bill plus 300 bps) = 2.7 mil there and then do that for each tranche somehow? how would i know what LIBOR is? seriously… i’d be in deep doo doo on something like this.

We need the Trez and Libor

You got the Jr., which is as far as I got, then they netted out the total payments and receiving flows and were able to eliminate the LIBOR via netting. Which was just rediculous. Then the remainder went to equity.

Tresury is given, Libor isn’t but as I said above, its netted out in the end. It’s worth cracking the CFAI book to check out the solution.

I get \$24,000,000 for the cash flow from the bonds and the junior tranche receives \$2,700,000 from \$24,000,000.

I don’t expect to see this on the exam. If it is I’m believe I can figure it out.

hopefully come 6/7 those calculations dont come up…otherwise all of us at roughly the same time will be saying ahhhh sh*t I should have looked at those ans…

Yeah, that’s where we are so far, but htat’s not the full answer. After that is when it gets hairy, check the CFAI answers, its worth the read, but too long to type.

hahahah, that is just silly. i mean, silly that it works and of course the \$150 mil tranche is libor plus and the asset mgr is conveniently swapping around libor for 150 mil also. seriously, i hope this is just the text writers laughing and having some fun with us. if the real exam looks like this, i might walk out and start drinking early. thx for freaking me out swan. or as billy madison would say out of nowhere when playing with shampoo and conditioner, STOP LOOKING AT ME SWAN!

LOL!!!

Still trying: Because of the swap, \$10,800,000 goes to the senior tranche. So far \$10,800,000 + \$2,700,000 has been allocated which leaves \$10,500,000 to equity tranche? Edit: What I said doesn’t really make that much sense.

i got your 10.8 for the asset mgr. the 2.7 jr dude. but senior you pay out 90 bps still, no? so that’s another 1.35 mil paid? so 24 - 10.8 - 2.7 - 1.35 = 9.15? we almost to the promised land?