Default rate Recovery rate YTM Spread 10-Yr Treasury YTM (as of 24 Feb) High-yield index YTM 3.7% 39% 8% 1.2% 35% 8% 1.8% Case 1 BEY 4.21% HYRS 5.59%…

Hi, I need help reviewing a piece of work I have done on calculating the ROE of the equity tranche of a CLO. Please help! THNK YOU!

The question listed here with my solution (Excel) attached here for your reference.

This is a very time critical item. Review and feedback ASAP will be highly appreciated and rewarded! 

Regards

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CLO Question

What is the expected Return on Equity to investors of a five year CLO (Collaterized Loan Obligation) in the first and second years if fees (2%) are paid (1%) in the first year and 1% in the second year and the Default and Recovery Rates are as follows: Losses are not charged to Equity until the end of the CLO in year 5?

Year One       Year Two

Default Rate                         0.03                0.08

Recovery Rates                    0.40                0.40

Assume that the recovery in year one is invested at the risk fee rate (.05) and the interest only from the recovered amount is part of the interest earned by the CLO in year two. Assume also that all the defaults occur in the second-half of the year that they take place and that annual interest (.10) on the pool of loans in the second year is based on the remaining pool after the first year. Interest on the pool of loans is paid semi-annually.

Regards