In structure II, tranche G is created from tranche F in structure I. What is the coupon rate for tranche G assuming that the combined coupon rate for tranches F and G in structure II should be 8.5%?
What will be an ideal response?
We can solve for tranche G's coupon rate (G%) by using the following weighted average formula:
8.5% = ($200/$500)(8.25%) + ($300/$500)(G%). Using algebra, simplifying, and rearranging, we get: G% = [8.5% – (0.4)8.25%] / 0.6 = [8.5% – 3.3%] / 0.6 = 8.6667%. Thus, tranche G has a coupon rate of about 8.67%.
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