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

An analyst compares a mortgage pool's prepayment speed to the PSA benchmark. The pool's CPR in month 20 of its life is 3.6%. The PSA benchmark assumes CPR rises by 0.2% per month until month 30, then stays at 6%. The pool's speed in month 20 is best described as:

The pool is running at 90% PSA. At month 20 the 100% PSA benchmark CPR is 0.2% × 20 = 4.0%. Dividing the pool's actual 3.6% CPR by 4.0% gives 0.90. The 6% terminal rate does not apply until month 30.

  1. A75% PSA
  2. B90% PSACorrect
  3. C120% PSA

Explanation

At 100% PSA, month 20 CPR = 0.2% × 20 = 4.0%. The pool's CPR is 3.6%, so speed = 3.6/4.0 = 90% PSA. Using the 6% terminal rate as the base would give 60%, which is wrong because the pool is still in the ramp-up period.

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