CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Select the conditions from below that would cause mortgages to be prepaid faster than 100 PSA.

I. Interest rates are at all-time low.
II. It is summer time.
III. The economy is booming.
A. I and II
B. I and III
C. I, II and III
Explanation: Low interest rates motivate borrowers to refinance, thereby increasing prepayment speed.

More home sales and relocations take place in summer than any other season, because families prefer to move between school years. This also causes higher prepayments.

When the economy is booming, there are more home sales; people relocate to choice jobs in other cities and "buy up" to more expensive homes.

Note how the speed quote convention is used in the question.

User Contributed Comments 6

User Comment
hkbn what about higher interest rates in a booming economy
wollogo Surely seasonality is taken into account in original estimate of 100PSA, this is known with certainty at the formation of the security.
ThePessimist Remember that PSA is a benchmark, not a prepayment model. It specifies a specific rate of prepayment, and therefore is *not* adjusted for seasonality.
zwer London agents are busier in spring when bonuses are paid. Ppl are away durng summer. Mind you, the exam is US-focused.
MonkeySee Wollogo: Consider how the PSA estimate is created. Go look it up in your notes. It has no variation for seasonality.
MattNYC True - the PSA is a monthly BM, not model driven so I guess it (PSA) could change m-o-m and reflect seasonal changes.
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