LOS d: Compare and contrast the conditional prepayment rate (CPR) to the Public Securities Association (PSA) prepayment benchmark.

Q1. Which of the following is the best explanation of a single-monthly mortality rate? The single-monthly mortality rate is the:

A)   assumed monthly prepayment rate for a pool.

B)   assumed monthly prepayment rate for each individual loan.

C)   realized monthly prepayment rate for a pool.

Q2. What is the relation between the PSA prepayment benchmark and the conditional prepayment rate (CPR)? The PSA prepayment benchmark is:

A)   expressed as a monthly series of CPR's.

B)   expressed as an annual series of CPR's.

C)   not related to the CPR.

Q3. The Public Securities Association (PSA) prepayment benchmark assumes that:

A)   there is a linear relationship between conditional prepayment rate (CPR) and the single monthly mortality rate (SMM).

B)   the monthly prepayment rate for a mortgage pool increases as it ages or becomes seasoned.

C)   the monthly prepayment rate for a mortgage pool decreases as it ages or becomes seasoned.

Q4. Which of the following is TRUE for a conditional prepayment rate? A conditional prepayment rate is the:

A)   annual prepayment expressed as a percentage of the amount at the end of the period.

B)   annual prepayment expressed as a percentage of the amount at the beginning of the period.

C)   monthly prepayment expressed as a percentage of the amount at the beginning of the period.

Q5. Regarding prepayment rates, which of the following statements is least accurate?

A)   The conditional prepayment rate (CPR) is the assumed rate at which the mortgage pool balance is prepaid.

B)   If the conditional prepayment rate (CPR) is converted into a monthly rate, it is called the single monthly mortality rate (SMM).

C)   The conditional prepayment rate (CPR) is the actual rate at which the mortgage pool balance is prepaid.

Q6. Which of the following is the best explanation of a conditional prepayment rate? The conditional prepayment rate is the:

A)   prepayment rate assumed for a pool based on the characteristics of the pool and the economic environment.

B)   percentage of the total liability that a borrower prepays conditional on the fact that he prepays.

C)   realized prepayment rate of a pool.

Q7. Which of the following is a CORRECT description of the Public Securities Association (PSA) prepayment benchmark? The PSA prepayment benchmark assumes that prepayment rates are:

A)   high for newly originated mortgages and then will lower as the mortgages become seasoned.

B)   low during high-interest rate periods and high during low-interest rate periods.

C)   low for newly originated mortgages and then will speed up as the mortgages season.

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