expected Return on Equity

What is the expected Return on Equity for the equity trache in each of the first two years of a five year CLO (Collateralized Loan Obligation)?

Note:

· 2.0 billion dollar pool

· Fees are paid at the end of the year and are 1% (of face value) in the first year and 1% (of face value) in the second year.

· Assume that the defaults occur at the beginning of the second-half of each year.

· The recovery from the defaults is invested immediately at (5%).

· The annual interest on the pool f loans (i=10%) is paid semiannually and is based on the remaining balance of loans in the pool.

· The default rates and recovery rates are provided below: Losses are not reduced from equity until the end of the CLO

Default rate Y1- 3%, Y2 - 8%

Recovery rate Y1 - 40% Y2 - 40%