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

At the start of a month, a pass-through pool has a balance of $100.0 million. Scheduled principal for the month is $0.2 million, and the SMM is 1.00%. What is the projected prepayment amount for the month?

Prepayments are the SMM applied to the balance remaining after scheduled principal is paid: 1% of $99.8 million, or $0.998 million. Applying the SMM to the full $100 million balance would overstate the prepayment, because scheduled principal has already reduced the balance that can prepay.

  1. A$1.000 million
  2. B$0.998 millionCorrect
  3. C$1.198 million
  4. D$0.200 million

Explanation

Prepayment = SMM x (beginning balance - scheduled principal) = 1% x (100.0 - 0.2) = $0.998 million. Applying SMM to the full $100 million gives $1.000 million, which ignores that scheduled principal has already reduced the balance. $1.198 million is total principal, not prepayment.

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