FRM Part II · FRM Exam Part II · Structured Credit Risk
A mortgage pool has an outstanding balance of $500 million at the start of a month. The single monthly mortality (SMM) rate is 0.8%, and scheduled principal payments for the month are $2.0 million. What is the approximate unscheduled prepayment for the month?
Unscheduled prepayment equals SMM times the balance after scheduled principal: 0.8% x ($500 million minus $2 million) = 0.008 x $498 million = $3.984 million. Using the full beginning balance would overstate it at $4.0 million.
- A$3.984 millionCorrect
- B$4.000 million
- C$4.016 million
- D$0.800 million
Explanation
Prepayment = SMM x (beginning balance - scheduled principal) = 0.008 x (500 - 2.0) = 0.008 x 498 = $3.984 million. Applying SMM to the full $500 million gives $4.000 million, which ignores the scheduled principal adjustment.
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