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Consider a pool of 1,000 interest-only mortgages with annual payments. Each mortgage was issued for $200,000 with a contract interest rate of 7%. All mortgages
- Consider a pool of 1,000 interest-only mortgages with annual payments. Each mortgage was issued for $200,000 with a contract interest rate of 7%. All mortgages are contracted to be paid off by the end of year 3. In each of years 1, 2 and 3, the hazard rate of default -- that is, the probability the mortgage defaults given it has not defaulted previously -- is 3%. In the event a mortgage defaults in any year, you only receive $139,100 in cash from that mortgage in that year. What is the expected IRR of the pool of mortgages?
Note: When computing the number of mortgages remaining in the pool in any given year, do not round.
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