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

A mortgage pool has a beginning-of-month balance of USD 200 million. The scheduled principal payment for the month is USD 0.5 million. The pool's single monthly mortality (SMM) rate is 0.8%. What is the projected prepayment for the month (in USD)?

Prepayment equals the SMM multiplied by the balance remaining after scheduled principal: 0.008 times (200 million minus 0.5 million) equals USD 1.596 million. Applying SMM to the full 200 million would overstate prepayment because scheduled principal has already reduced the balance.

  1. AUSD 1.60 million
  2. BUSD 1.596 millionCorrect
  3. CUSD 1.592 million
  4. DUSD 1.604 million

Explanation

Prepayment = SMM x (beginning balance - scheduled principal) = 0.008 x (200 - 0.5) = 0.008 x 199.5 = 1.596 million. Using the full 200 million balance gives 1.60 million, which ignores the scheduled principal adjustment.

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