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CMA Final · Strategic Financial Management · Securitization

A securitised pool has a Single Monthly Mortality of 0.5% every month. The annualised prepayment rate, the Conditional Prepayment Rate (CPR), is closest to:

CPR is about 5.84%. It equals one minus (1 minus SMM) raised to 12, so 1 minus 0.995^12, giving roughly 0.0584. Simply multiplying 0.5% by twelve gives 6%, which ignores compounding of surviving balances and is therefore incorrect.

  1. A6.00%
  2. B5.84%Correct
  3. C6.17%
  4. D0.50%

Explanation

CPR = 1 - (1 - SMM)^12 = 1 - (0.995)^12. (0.995)^12 is about 0.94162, so CPR is about 5.84%. The simple 0.5 x 12 = 6.00% ignores compounding, and 6.17% wrongly compounds upward as (1.005)^12 - 1.

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