Several balloon mortgages are securitized. The principal of each of them is $1000 and they promise an annual interest payment of 6% for three years and then together with the third interest payment, the principal will be paid back as well..

a) Price an interest only (just the interest) and a principal only (all principal payments) security given that the current market rate is 4% (under the assumption of no default and no pre-payment)

b) Assume that immediately after the first interest payment, half the mortgages prepay. Who wins and who loses? How much? 

c) In general, what risks do holders of principal only tranches face? (Please limit your answer to two sentences).