Skip to content

FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

A pass-through pool starts a month with a balance of USD 100 million, a WAC of 6.00%, and a pass-through rate of 5.50%. Scheduled principal is USD 0.10 million. The conditional prepayment rate (CPR) is 12% annualized. Using SMM = 1 - (1 - CPR)^(1/12), approximately what is the interest paid to investors and the prepayment amount for the month?

Investors receive interest at the pass-through rate: 100 x 5.5%/12 = USD 0.458 million. SMM is 1 - 0.88^(1/12) = about 1.059%, so prepayment is about 1.059% x 99.9 = USD 1.06 million. Using the WAC or CPR/12 would be errors.

  1. AInterest USD 0.458 million; prepayment USD 1.06 millionCorrect
  2. BInterest USD 0.500 million; prepayment USD 1.06 million
  3. CInterest USD 0.458 million; prepayment USD 1.00 million
  4. DInterest USD 0.458 million; prepayment USD 1.20 million

Explanation

Investor interest = 100 x 5.50%/12 = 0.4583 million (the WAC would give 0.500). SMM = 1 - 0.88^(1/12) = 1 - exp(ln0.88/12) = 1 - exp(-0.010651) = 0.010594. Prepayment = 0.010594 x (100 - 0.10) = 1.058, about USD 1.06 million. Dividing CPR by 12 gives 1.00% and a wrong prepayment.

Did you get it right without looking?

One question tells you little. A timed set on Mortgages and Mortgage-Backed Securities shows your real accuracy, how long you take and where you lose marks.

Practise Mortgages and Mortgage-Backed SecuritiesFree diagnostic mock

More Mortgages and Mortgage-Backed Securities questions