- 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**

Assume that an outstanding loan is $300,000. The scheduled principal and interest payments are $1,000 and $3,000. If the actual payments in the first month are $8,000, what is the SMM?

A. 1.28%

B. 1.34%

C. 1.48%

**Explanation:**SMM = (8,000 - 3,000 - 1,000)/(300,000 - 1,000) = 1.34%. This means that 1.34% of the month's scheduled principal balance has been prepaid.

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**User Contributed Comments**
3

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

bscotty |
Is answer correct? Shouldn't interest be left out of it and the right equation be SMM = Prepayment/(Mortgage balance beginning of month - Scheduled Principal payment)? |

droko |
bscotty: you want to get prepayment so you take out scheduled principal AND interest. It is correct. |

tomalot |
No need to calculate this for level 1 I think? |