313.1. Let's assume the same three-tier securitization structure illustrated by Malz section 9.2¹⁰ with identical assumptions for convenience:

• The loans in the collateral pool and the liabilities are assumed to have a maturity of five (5) years
• Assets consist of 100 identical leveraged loans with par value of $1.0 million each, priced at par, paying a fixed 8.5%, i.e., 350 bps over LIBOR flat at 5.0%
• Senior debt (senior bonds) of $85.0 million paying a coupon of LIBOR + 50 bps
• Mezzanine debt (junior bonds) of $10.0 million paying a coupon of LIBOR + 500 bps
• This scenario assumes a default rate of 2.0% per annum and the recovery rate is 40%
• The money market rate is 5.0%

Here is the five-year scenario given by these assumptions:

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)  
Defaults Survived Loan Excess Over- Recovery OC + Equity  
t Annual Cum’l Interest Spread collateral Recovery Flow Results OC a/c  
d(t) L(t) L(t)-B OC(t) R(t) OC(t)  
+R(t)  

0 (5.00)  
1 2.0 2.0 98.0 `$8.33`0 `$2.65`5 `$1.75`0 `$0.80`0 `$2.55`0 `$0.90`5 Y `$2.55`0  
2 2.0 4.0 96.0 8.160 2.485 1.750 0.800 2.550 0.735 Y 5.228  
3 2.0 6.0 94.0 7.990 2.315 1.750 0.800 2.550 0.565 Y 8.039  
4 2.0 8.0 92.0 7.820 2.145 1.750 0.800 2.550 0.395 Y 10.991  
5 2.0 10.0 90.0 97.650 0.800 9.315 11.540  

Total terminal avai funds = L(5) + R(5) + OC a/c (final) 109.990  
Owed to bond tranches 100.675  
Note: except for defaults/survive, all amounts in $millions Equity terminal cash flow 9.315  

(Source: Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011))

Each of the following is true about this structure EXCEPT which is not?

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)  
Defaults Survived Loan Excess Over- Recovery OC + Equity  
t Annual Cum’l Interest Spread collateral Recovery Flow Results OC a/c  
d(t) L(t) L(t)-B OC(t) R(t) OC(t)  
+R(t)  

0 (5.00)  
1 2.0 2.0 98.0 `$8.33`0 `$2.65`5 `$1.75`0 `$0.80`0 `$2.55`0 `$0.90`5 Y `$2.55`0  
2 2.0 4.0 96.0 8.160 2.485 1.750 0.800 2.550 0.735 Y 5.228  
3 2.0 6.0 94.0 7.990 2.315 1.750 0.800 2.550 0.565 Y 8.039  
4 2.0 8.0 92.0 7.820 2.145 1.750 0.800 2.550 0.395 Y 10.991  
5 2.0 10.0 90.0 97.650 0.800 9.315 11.540  

Total terminal avai funds = L(5) + R(5) + OC a/c (final) 109.990  
Owed to bond tranches 100.675  
Note: except for defaults/survive, all amounts in $millions Equity terminal cash flow 9.315  

(Source: Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011))

Each of the following is true about this structure EXCEPT which is not?