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%.

12. What would be the value of all IO 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 85% of the `prepaid balance).