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

An analyst uses the PSA benchmark. A 30-year pool is 20 months old (seasoned). Under 100% PSA, CPR rises 0.2% per month of age until month 30, then stays at 6%. Under 150% PSA, which is the CPR for this pool in month 20, and the CPR once the pool is beyond month 30?

At 100% PSA the month-20 CPR is 4.0% (0.2% times 20), and the plateau is 6%. Scaling both by 150% gives a 6.0% CPR in month 20 and a 9.0% CPR after month 30. Ignoring the multiplier understates prepayments.

  1. A4.0% in month 20; 9.0% after month 30
  2. B6.0% in month 20; 9.0% after month 30Correct
  3. C6.0% in month 20; 6.0% after month 30
  4. D4.0% in month 20; 6.0% after month 30

Explanation

At 100% PSA, month 20 CPR = 0.2% x 20 = 4.0%. At 150% PSA multiply by 1.5: 6.0%. After month 30 the 100% PSA CPR is 6%, so 150% PSA gives 9.0%. Option A forgets to scale by 150% in month 20.

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