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BOA originates 100 Fully Amortizing Fixed Rate Mortgages, each has a $1,000 balance, 5% interest rate (no fees), 25-year term, and annual payments. BOA immediately
BOA originates 100 Fully Amortizing Fixed Rate Mortgages, each has a $1,000 balance, 5% interest rate (no fees), 25-year term, and annual payments. BOA immediately issues IO and PO strips backed by the pool of these mortgages and sells them to investors who discount payoffs at 4%.
What would be the value of all PO strips if instead, the expected default rate was 10% per year? Assume that in case of default, BOA recovers 85% of the balance (i.e. default is prepayment but you receive only 80% of the prepaid balance).
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