Question

$10,000,000 of a 7% 10 year FRM pool making annual payments is allocated to a PO/IO class. At approximately what level of prepayment will the IRR of IO class be 0? (Use the excel sheet/graph, round to the nearest percentage. For example, if your answer is two percent, enter 2). The answer on Chegg is wrong, please show me the work

Answer 1

Given,
Initial Investment = $10,000,000.
Interest rate = 7%
Annual cash flows, CF = (10,000,000*7%) = 700,000.
Calculation of IRR = [[CF1/(1+r)1 + CF2/(1+r)2 + ………..] = 0
Assuming IRR @ 10%
Years	Cash Flows	Present value factor	CF*PVF
1	700,000	0.9091	$ 636,370.00
2	700,000	0.8264	$ 578,480.00
3	700,000	0.7513	$ 525,910.00
4	700,000	0.683	$ 478,100.00
5	700,000	0.6209	$ 434,630.00
6	700,000	0.5645	$ 395,150.00
7	700,000	0.5132	$ 359,240.00
8	700,000	0.4665	$ 326,550.00
9	700,000	0.4241	$ 296,870.00
10	10,700,000	0.3855	$       4,124,850.00
			$       8,156,150.00
Assuming IRR @ 7%
Years	Cash Flows	Present value factor	CF*PVF
1	700,000	0.9346	$ 654,220.00
2	700,000	0.8734	$           611,380.00
3	700,000	0.8163	$ 571,410.00
4	700,000	0.7629	$ 534,030.00
5	700,000	0.713	$ 499,100.00
6	700,000	0.6663	$ 466,410.00
7	700,000	0.6228	$ 435,960.00
8	700,000	0.582	$ 407,400.00
9	700,000	0.5439	$ 380,730.00
10	10,700,000	0.5083	$       5,438,810.00
			$       9,999,450.00
		Initial investment	$     10,000,000.00
		Balance =	$ 550.00
We can see that @ 7% of IRR is the value is almost equal to zero. So, we can say that approx. @ 7% of prepayment the IRR of IO will be zero.