CFA Level I · CFA Level I Exam · Fixed-Income Securitization
A mortgage pool has 400 million of outstanding principal at the start of a month. The scheduled principal payment for the month is 2 million. The single monthly mortality rate (SMM) is 0.5%. The unscheduled principal prepayment for the month is closest to:
Prepayment equals SMM times the beginning balance less scheduled principal: 0.5% × (400 − 2) million = 1.99 million. Applying the rate to the full 400 million balance would wrongly give 2.00 million.
- A1.99 millionCorrect
- B2.00 million
- C2.01 million
Explanation
Prepayment = SMM × (beginning balance − scheduled principal) = 0.005 × (400 − 2) = 0.005 × 398 = 1.99 million. Using the full 400 million gives 2.00 million, which ignores the scheduled principal deduction.
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