BOA originates 1000 Fully Amortizing Fixed Rate Mortgages, each has a $100,000 balance, 6.5% interest rate (no fees), 30 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 5.5%.

7. What profits does BOA make immediately?

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 10% 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