Skip to content

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

A mortgage pool has a conditional prepayment rate (CPR) of 12% per year. What is the equivalent single monthly mortality rate (SMM)?

The SMM is found by converting the annual CPR through compounding: 1 minus 0.88 raised to the power 1/12, which is about 1.06% per month. Simply dividing the 12% CPR by twelve gives 1.00%, which ignores the fact that prepayments reduce the balance each month.

  1. A1.00%
  2. B1.06%Correct
  3. C1.27%
  4. D1.50%

Explanation

SMM = 1 - (1 - CPR)^(1/12) = 1 - 0.88^(1/12). ln(0.88) = -0.12783, divided by 12 = -0.010653, and exp of that is 0.98940, so SMM is about 1.06%. Simply dividing 12% by 12 gives 1.00%, which ignores compounding.

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