3. An investor is considering the purchase of an IO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $50 million in mortgages with a maturity of 10 years and a fixed rate of 5 percent (annual payments). Assume a constant prepayment rate of 10 percent on the underlying residential mortgage loans (based on the pool balance at the end of the year).

a.	If the interest rate demanded by investors on this investment were 4%, what would be the price of the IO strip?
b.	Explain why IO strips are considered bearish instruments (i.e., bought when interest rates are expected to rise in the future).