FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A pass-through MBS pool has a 6% weighted average coupon and the pool's SMM in a given month is 0.5%. Using the standard conversion, which annualized CPR is closest to this monthly rate?
The annualized CPR is about 5.8%. CPR equals one minus the twelfth power of one minus the SMM, so 1 minus 0.995^12 gives roughly 5.84%. Simply multiplying 0.5% by twelve ignores compounding and overstates the annual prepayment rate at 6.0%.
- A5.8%Correct
- B6.0%
- C5.0%
- D0.5%
Explanation
CPR = 1 - (1 - SMM)^12 = 1 - (0.995)^12. 0.995^12 = 0.94162, so CPR = 5.84%, about 5.8%. Multiplying SMM by 12 gives 6.0%, which ignores compounding and is therefore not the correct conversion.
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