Assume that instead of expected prepayment, there is an expected default rate in year 1 was 40%
Question:
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.
a. What would be the value of all IO strips in this case? Pick the closest number.
b. What would be the value of all PO strips?
c. What would be the BOA's profits?
d. What would be the value of all PO strips?
e.What would be the BOA's profits?
f. Back to the original question without prepayment or default, assume that instead of selling the mortgages immediately, BOA sells them in one year. What is BOA's IRR from this deal (originate mortgages at t=0 and sell at t=1)? Note that BOA collects the first mortgage payment, so it sells just the one remaining payment.
Advanced Financial Accounting
ISBN: 978-0132928939
7th edition
Authors: Thomas H. Beechy, V. Umashanker Trivedi, Kenneth E. MacAulay