CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features
A mortgage pool has a single monthly mortality (SMM) of 0.50% in a given month. The annualized conditional prepayment rate (CPR) is closest to:
The CPR is about 5.8%. Annualize the monthly rate by compounding: CPR = 1 − (1 − 0.005)^12, which equals roughly 5.84%. Simply multiplying 0.50% by 12 gives 6.0%, which ignores compounding of the surviving balance and is therefore too high.
- A5.8%Correct
- B6.0%
- C6.2%
Explanation
CPR = 1 − (1 − SMM)^12 = 1 − (0.995)^12. ln(0.995) = −0.0050125, times 12 = −0.06015, exp = 0.94163, so CPR = 5.84%. Multiplying SMM by 12 gives 6.0%, which ignores compounding and overstates CPR.
Did you get it right without looking?
One question tells you little. A timed set on Mortgage-Backed Security (MBS) Instrument and Market Features shows your real accuracy, how long you take and where you lose marks.
More Mortgage-Backed Security (MBS) Instrument and Market Features questions
- Interest rates fall sharply, and borrowers in a pool of 30-year fixed-rate mortgages refinance in large numbers. For an investor in the pass…
- A borrower takes a 25-year mortgage whose monthly payments cover interest only for the first five years. After that, payments rise so that t…
- A pass-through pool is described at 150 PSA. Compared with 100 PSA, the conditional prepayment rate (CPR) at month 30 and later is most like…
- Compared with a pass-through security priced at par, a mortgage pass-through priced at a significant premium to par is most likely to experi…
- A planned amortization class (PAC) tranche is most likely to maintain its scheduled principal payments:
- A CMBS loan with a 10-year term and a 30-year amortization schedule is most likely to expose investors to which risk near maturity?