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please show work interest rate, A. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that
please show work
interest rate, A. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that would be payable to investors in this tranche. If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the IO and PO strips? B. If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the 10 and PO strips change? Which security, the IO or PO, exhibits the greatest price change from (a)? Why? C. Investor interest rates now decline to 6 percent. What is the price of the IO? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the IO and PO be now? (Assume that the 20% prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) Which security, the Step by Step Solution
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