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 beginning of the period. |
| B)
| annual prepayment expressed as a percentage of the amount at the end of the period. |
| C)
| monthly prepayment expressed as a percentage of the amount at the beginning of the period. |
|
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. |