What is the price of each share of the IO-PO Strips

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Question - The Green Bank originates a pool of containing 100 30-year fixed-rate mortgages with loan amount of $250,000 each. All mortgages in the pool carry a rate of 6.5% with monthly payments. The servicing fee is 0.05% each month. The Green Bank would like to sell the pool to investors via IO/PO Strips. Suppose that they issue 150,000 shares of IO/PO Strips and the market interest rate is 6%.

Required -

Assume that there are no prepayment and no default, how much an investor would like to pay for each share of the IO/PO Strips?

What is the price of each share of the IO/PO Strips if there are a constant prepayment rate of 1.5% every month and no default?

What is the price of each share of the IO/PO Strips if there are a constant default rate of 1.5% every month (assuming the recovering rate is 50%) and no prepayment? Please briefly discuss your findings.

Reference no: EM133003235

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