CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

An investor currently owns an MBS that has a coupon rate of 7% and a pro rata share of principal in the amount of $22,000. The scheduled principal repayment to the investor for the current month is $284 and the conditional prepayment rate (CPR) is assumed to be 9% for the year. Which of the following would best estimate the dollar amount of the prepayment that can be expected for the month?
A. $161.27
B. $170.00
C. $172.22
Explanation: SMM = 1 - (1 - CPR)1/12 = 0.783%

Prepayment for the month = SMM [(Beginning mortgage balance) - (Scheduled principal repayment)] = 0.0078284 (22000 - 284) = $170.00

Note that repayment refers to scheduled payments, "prepayment" refers to unscheduled payments.

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