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%. Hint: use the Prepay.xlsx file on Blackboard, especially the last years HW7 example.

8. What is the value of all PO strips?

9. What would be the value of all PO strips if the expected prepayment rate was 15% per year?

10. 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 balance (i.e. default is prepayment but you receive only 80% of the `prepaid balance).