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CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

A pass-through pool has an outstanding balance of 200,000,000 at the start of a month. The single monthly mortality rate (SMM) is 0.50%, and scheduled principal for the month is 1,000,000. Prepayment for the month is closest to:

Prepayment equals SMM times the balance after scheduled principal: 0.5% × (200 million − 1 million) = 0.995 million. Applying the SMM to the full beginning balance would wrongly give 1.000 million because it ignores the scheduled principal already paid.

  1. A0.995 millionCorrect
  2. B1.000 million
  3. C1.005 million

Explanation

SMM = prepayment / (beginning balance − scheduled principal). Balance after scheduled principal = 199,000,000. Prepayment = 0.005 × 199,000,000 = 995,000, or 0.995 million. Using the full 200,000,000 gives 1.000 million, which ignores scheduled principal.

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