Athens First S&L originated a pool containing 75 ten-year fully amortizing fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in the pool carry an interest rate of 12% and have annual payments.

1. Suppose the bond investors buy the MPTs assuming the 10% prepayment rate and 0% default rate as in question (2). However, suppose that in reality there are no prepayments, but there are 10% of default losses each year (for simplicity, assume that 10% of the pools principal balance is lost each year to default, except for the final year, in which there will be no defaults; default losses in year Y will be 10% x pool beginning balance in year Y).[1]

1. What is the realized IRR to MPT investors?

2. What price would investors have paid for each individual security if their discount rate was 10.5%, but they correctly forecast the cash flows (e.g. 10% default, 0% prepayment).