- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 45. Introduction to Asset-Backed Securities
- Subject 4. Mortgage Pass-Through Securities

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**CFA Practice Question**

You have invested in a mortgage pool with a $100,000 principal balance outstanding at the beginning of the 35th month. The scheduled monthly principal payment for month 35 is $300. Assuming 120 PSA, the estimated prepayment amount should be ______.

A. $619

B. $723

C. $588

**Explanation:**Since the pool is over 30 months old, CPR = 6% x 1.2 = 7.2%

SMM = 1 - (1 - 0.072)

^{1/12}= 0.006208

Estimated prepayment amount = (0.006208) ($100,000 - $300) = $619

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**User Contributed Comments**
3

User |
Comment |
---|---|

rjdelong |
Can anyone explain where the CPR 6% comes from? |

olympria |
A mortgage aged more than 7 years should have CPR of 6% (given in study material/LOS) which translates to a 100 PSA. Here, the PSA is 120 (which is 20% higher), therefore, the CPR should also be 20% higher which is 7.2% |

dbalakos |
Can anyone explain why the annualization is done like that? |