Reading 57: Mortgage-Backed Sector of the Bond Market-LOS d 2011, face, following, contrast, center

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Session 15: Fixed Income: Structured Securities
Reading 57: Mortgage-Backed Sector of the Bond Market

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

 

 

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 each individual loan.

B) realized monthly prepayment rate for a pool.

C) assumed monthly prepayment rate for a pool.

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The single-monthly mortality rate is equal to the conditional prepayment rate expressed on a monthly basis.

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

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

B) not related to the CPR.

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

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The PSA prepayment benchmark is expressed as a monthly series of CPR's that increase over the life of the liabilities.

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

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

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

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

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The Public Securities Association (PSA) prepayment benchmark assumes that the monthly prepayment rate for a mortgage pool increases as it ages or becomes seasoned.

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Which of the following statements regarding a conditional prepayment rate (CPR) is CORRECT? A CPR is the:

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

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

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

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The CPR is the annual rate at which a mortgage pool balance is assumed to be prepaid during the life of the pool. The CPR for any given mortgage pool depends on characteristics such as past prepayment rates, along with the current and expected economic state of affairs. To convert the CPR into a monthly rate called the single-monthly mortality rate (SMM), the following formula applies: SMM = 1 – (1 – CPR)1/12.

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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.

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CPR is the assumed rate at which the mortgage pool balance is prepaid, not the actual rate at which it is prepaid.

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

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

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

C) realized prepayment rate of a pool.

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The conditional prepayment rate convention for describing the pattern of prepayments and the cash flow of a passthrough assumes that some fraction of the remaining principal in the pool is pre-paid each month for the remaining term of the mortgage. The rate is influenced by the economic environment and the characteristics of the mortgage pool.