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For the next four questions, assume that instead of expected prepayment, there is an expected default rate in year 1 was 40% (and no defaults
For the next four questions, assume that instead of expected prepayment, there is an expected default rate in year 1 was 40% (and no defaults in year 2)? Assume that in case of default, BOA recovers 70% of the balance.
1.What would be the value of all IO strips in this case?
2.What would be the value of all PO strips?
3.What would be the BOAs profits?
4.What would be the BOAs profits?
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