Skip to content

FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

A mortgage pool has a beginning balance of USD 200 million. In month 1 the scheduled principal payment is USD 0.25 million and the SMM is 0.5%. Assuming the SMM applies to the balance after scheduled principal, what is the month-1 prepayment amount?

The month-1 prepayment is about USD 0.9988 million. The SMM of 0.5% applies to the balance after scheduled principal, which is 199.75 million, giving 0.99875 million. Applying it to the full 200 million would overstate prepayment by ignoring the scheduled principal reduction.

  1. AUSD 0.9988 millionCorrect
  2. BUSD 1.0000 million
  3. CUSD 0.9975 million
  4. DUSD 0.2500 million

Explanation

Prepayment = SMM x (beginning balance - scheduled principal) = 0.005 x (200 - 0.25) = 0.005 x 199.75 = 0.99875 million, about 0.9988. Using the full 200 million gives 1.0000, which ignores the scheduled principal adjustment.

Did you get it right without looking?

One question tells you little. A timed set on Mortgages and Mortgage-Backed Securities shows your real accuracy, how long you take and where you lose marks.

Practise Mortgages and Mortgage-Backed SecuritiesFree diagnostic mock

More Mortgages and Mortgage-Backed Securities questions