The structure of a collateralised debt obligation (CDO) is $800 million. It consists of 4 tranches:Tranche A 60% of the structure Coupon: Treasury Rate + 200 bpsTranche B 20% of the structure Coupon: LIBOR + 50 bpsTranche C 10% of the structure Coupon: Fixed Rate 9%Equity Tranche 10% of the structureThe collateral under the structure consists of bonds with 10 years maturity and coupon 8%. Assuming there is no default in the collateral pool and ignoring all other fees and expenses, illustrate how to calculate the bond-equivalent yield and effective yield of the equity tranche, given the 10-year Treasury rate is 4% and the LIBOR is 6.5%. (The coupons in the collateral and tranches are all semi-annually paid)
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