Q.4398 A collateralized loan obligation is comprised of 100 identical leveraged loans with a par value of $1,000,000 each, priced at par. The loans pay a fixed spread of 4% over one-month Libor. The capital structure consists of senior, junior and equity tranches which are 85%, 10%, and 5% of the pool, respectively. The spreads on the senior and mezzanine tranches are 200bps and 500bps, respectively. Any spread exceeding $2,000,000 is diverted to the trust account. Determine the cash flows to the mezzanine and excess trust account in the first period. Assumptions:

• The swap curve (“Libor”) is flat at 5%
• There are no upfront, management, or trustee fees
• The loans in the collateral pool and the liabilities are assumed to have a maturity of five years.
• All coupons and loan interest payments are annual, and occur at year-end
• There are no defaults in the collateral pool