FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A pool has a constant prepayment rate of 12% CPR. Using the standard relationship between CPR and SMM, which is closest to the monthly SMM?
The SMM is about 1.06%. It comes from 1 minus the twelfth root of (1 minus 0.12), which is 1 minus 0.8800 to the power one-twelfth. Dividing 12% by 12 to get 1.00% is wrong because prepayment compounds monthly.
- A1.00%
- B1.06%Correct
- C0.94%
- D0.50%
Explanation
SMM = 1 - (1 - CPR)^(1/12) = 1 - 0.88^(1/12). ln 0.88 = -0.12783; divided by 12 = -0.010653; exp = 0.98940, so SMM = 1.06%. Simple division, 12%/12 = 1.00%, ignores compounding.
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.
More Mortgages and Mortgage-Backed Securities questions
- A mortgage pool has a beginning-of-month balance of USD 200 million. The scheduled principal payment for the month is USD 0.5 million. The p…
- In a typical non-agency residential mortgage-backed securitization, the cash flows from the mortgage pool are allocated across tranches. Whi…
- Which feature of the pre-2007 originate-to-distribute model most directly weakened lenders' incentives to screen subprime borrowers carefull…
- A lender offers a 5/1 hybrid adjustable-rate mortgage (ARM). Which description of its rate structure is correct?
- A pass-through MBS pool has a weighted average coupon of 6.0% and a pass-through rate of 5.5%. Interest rates in the market fall sharply, an…
- A pass-through MBS is trading at a price above par with homeowners holding mortgages whose coupon rates are well above current market mortga…