FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A pass-through pool is projected to prepay at 150 PSA. Under the standard PSA benchmark, 100 PSA has CPR rising by 0.2% per month for the first 30 months and then staying at 6%. What is the approximate SMM in month 20 for this pool?
At 150 PSA the month-20 CPR is 1.5 times the 100 PSA rate of 4%, which is 6%. Converting to a monthly rate by 1 minus 0.94 to the power 1/12 gives an SMM of about 0.514%. Dividing 6% by 12 would ignore compounding.
- A0.514%Correct
- B0.500%
- C0.340%
- D0.750%
Explanation
At 100 PSA, month 20 CPR = 0.2% x 20 = 4%. At 150 PSA, CPR = 1.5 x 4% = 6%. SMM = 1 - 0.94^(1/12) = about 0.514%. 0.500% divides 6% by 12 without compounding, and 0.340% is the SMM for 4%, which is the 100 PSA CPR.
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